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Guide to Index Funds
Don't beat--or lose to--the market with index fundsAt the end of every quarter, the press releases from a lot of equities compare themselves to the S&P 500, that is the Standard & Poor's list of the 500 best stocks. In 1975 John Bogle created index fund investing with a stock index fund made up of proportions similar to the companies in the S&P 500. So when the fund is measured up to the S&P, it didn't win and didn't lose.
There are over 1,000 index funds available, but the main categories are:
1. Index funds which mirror the S&P 500.
2. Index funds that track groups of companies such as the Russell 2000 for small companies or the DJ Wilshire 5000 for the whole stock market.
3. Specific niches of funds, such as emerging markets or industrial stocks.
Action Steps
The best contacts and resources to help you get it done
Pick top-rated index funds
With over 1,000 index fund listings out there, it's hard to pick the right fund. Doing homework is crucial, and you should heed the analyst recommendations. The Vanguard S&P 500 index fund (VFINX) is the oldest stock index fund and a very popular one, but there are so many other flavors of funds that you should pick something you find interesting or something which will help make the portfolio more diversified.
I recommend:
Money Magazine keeps a list of its 70 best funds, including its top rated index funds. The Vanguard 500 fund, the first-ever index fund, is among its top picks. Go right to the source as well and take a look at the funds Vanguard lists.
Learn the basics of index fund trading
It is easy to buy index funds. They are traded on the New York Stock Exchange and shares can be purchased through any online or bricks-and-mortar brokerage. You can invest in index funds through either mutual funds or 'exchange-traded funds,' which trade like regular stocks. The returns on both of these are very similar.
I recommend:
TD Ameritrade and E*Trade offer free online accounts which can be used to buy and sell all funds. Most communities have a branch where you can visit a broker from a firm such as Wells Fargo.
Research to be on top of your index funds
Once you've decided to buy index funds, the hard part is following them. Knowing when to sell is the hard part about investing. Investment advisers recommend people check their investments each day. Look at an individual sector and figure out if it is good or bad for your fund.
I recommend:
While Yahoo, MSN and Google have great financial sections which can be used to check on an individual investment, The Street.com is a good resource for news about the bigger picture. If you purchased a fund through Fidelity, for example, you can check your investments on its website. There are indexes that track every publicly traded stock such as the Wilshire 5000 and the top 100 stocks traded on the Nasdaq exchange, with utility stocks, biotech stocks and more.
Tips & Tactics
Helpful advice for making the most of this Guide- Stay diversified. If you want index fund investments, don't pick them all in the financial sector or the bond sector. If you have an index fund investing in emerging markets, make sure you have something more stable. Spread your investments around and have them in multiple sectors so pain in one sector won't tank your whole portfolio.
