"By periodically investing in an index fund, the investor can actually out-perform most investment professionals."
- Warren Buffett
An index fund is a fund which mimics an index.
The S&P 500, the Dow Jones, the NASDAQ, and the Russell 2000 are all examples of US indexes.
Indexes represent a certain segment of the stock market.
The S&P 500 is made up of the 500 largest companies in the US from a market capitalization point of view.
Market capitalization = share price * # of shares outstanding
Apple, Microsoft, Amazon, Tesla, Google, and Meta are among the top holdings in the S&P 500 Index.
The Dow Jones is made up of only 30 stocks which represent the 30 large, well-respected companies in the US.
Microsoft, Boeing, Salesforce, Intel, Nike, JP Morgan Chase, Apple, McDonald's, Procter & Gamble, and Coca-Cola are holdings within the Dow Jones Industrial Average.
The NASDAQ Composite Index is made up of over 3500 different stocks.
To be included in the NASDAQ, a company must have earnings of at least $11 million in the previous 3 years and cash flow of at least $27.5 million in the previous 3 years.
Index funds provide built-in diversification.
Your eggs aren't all in one basket.
Index funds are the vehicle in which you can purchase a fund which mimics an index.
1. Open an investment account.
2. Research index funds.
3. Start investing.
4. Dollar-cost average contributions.
1. Open an Investment Account
Research the websites of the large discount brokerages.
Some examples are:
2. Research Index Funds
Look at your discount brokerage website to confirm these three characteristics of the funds:
A. Historical returns
This is the most important statistic.
Find a fund that has performed well over its lifetime and over the last 10 years.
B. Expense ratio
The expense ratio represents the amount of management costs associated with that fund.
Find funds with expense ratios less than 0.25%.
C. Turnover ratio
Turnover represents how many stocks are turned over each year (sold & bought).
The higher this percentage, the more likely you are to owe tax at the end of the year.
Find funds lower than 2.00%.
3. Start Investing
Don't fall into the trap of analysis paralysis when you first start investing.
The beauty of index funds is you only need to choose which index you prefer and then choose one of the funds which mimic your chosen index.
To simplify your life and reduce the friction of investing, link your checking account to your investment account.
Choose an amount you will invest every paycheck and transfer the funds every paycheck.
4. Dollar Cost Average (DCA) Your Contributions
Dollar cost averaging is the act of consistently investing, whether that is every two weeks, once a month, or quarterly.
DCA works because the market is volatile.
You may buy 10 shares one week, but are able to buy 12 shares the following month due to the prices decreasing.
Setting up a consistent amount to invest and investing in index funds gives you the freedom to not look at your account balance everyday.
You can invest with confidence, knowing your investments will pay off significantly in the long run.
Vanguard 500 Index Fund ETF
Ticker: VOO
0.03% expense ratio
SPDR S&P 500 ETF Trust
Ticker: SPY
0.09% expense ratio
iShares Core S&P 500 ETF
Ticker: IVV
0.03% expense ratio
Invesco QQQ Trust Series 1
Ticker: QQQ
0.20% expense ratio
Fidelity® NASDAQ Composite Index® Fund
Ticker: FNCMX
0.30% expense ratio
Fidelity® 500 Index Fund
Ticker: FXAIX
0.015% expense ratio
Schwab Total Stock Market Index Fund®
Ticker: SWTSX
0.03% expense ratio
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