Index Funds for Beginners
Set it and forget it: index funds for beginners
Compared to the nail-biting thrill of day trading, index fund investing is so simple and safe it’s boring–and that’s a good thing. Watch the nightly news and the anchor will comment on how the Dow and Nasdaq swooped or plummeted. These two, along with the Standard and Poor’s 500, are the big three of thousands of indices that track how markets, industries and companies have fared relative to the economy and each other. The easiest way to own pieces of your favorite companies is to take advantage of these indices through index funds.Index funds are a form of mutual fund, an assortment of stocks or bonds of different companies. The index fund mirrors a particular index, picking companies from that index to invest in. So, the fund generally tracks right along with the index, rising and falling in the market just as the index does. It doesn’t “beat” the market, it’s not meant to, and that’s a good thing. So get boring and:
1. Learn the basics of index funds in one sitting.
2. Plan out your investment strategy and check out the top performers among index fund listings.
3. Check out index investment options for a more active role in speculation.
Take a minute to learn index fund investment essentials
Wall Street gurus chant a mantra for new investors: "buy index funds." The first reason they cite is cost savings. Most mutual funds are actively managed, meaning an investment firm hires people to manage stock picks, pays for sales and marketing, advertising and more-think of all the overhead costs built into your company, then imagine your retirement fund financing those costs. An actively managed mutual fund must beat the market every year just to cover those costs; otherwise you actually lose money.
Try: Learn the basics of index fund investments in 60 seconds on multimedia financial services giant The Motley Fool. Then quickly peruse the Share Market Basics article comparing different types of mutual funds, to better understand the difference between an index fund and, say, a money market fund.
Maintain a safe investment record with top rated index funds
Now that you see the relative merits of safe asset acquisition, avoid the urge to gamble by using online planning tools to map out an investment strategy. As with any venture, the "eggs in a basket" analogy holds true. Take advantage of the hundreds of index funds available and select several to invest in. This diversification approach spreads out the risk of any one index fund having a down period and dragging down your overall portfolio.
Try: When investing in index funds, start with the source, the company that created the concept: Vanguard Group. Compare what you find to its highly regarded competitor, Fidelity Investments.
Spice up your investment planning with index fund trading
If you think you can handle a little excitement, or feel uncomfortable with a "set it and forget it" approach to investments, learn how to trade index funds with Exchange-Traded Funds (ETFs). These funds trade just like individual stocks meaning you can buy and sell any time the exchange is open. However, just like stocks you can lose money both by miss-timing the transaction and by racking up trading costs.
Try: Read the page on 20Somethingfinance for a quick comparison between ETFs and index funds. If you decide to get into ETFs, start with the granddaddy of ETFs, Standard and Poor’s Depositary Receipts (SPDR), or Spiders, that track the S and P 500–the same way John Bogle started index funds in the 1970s. Review MarketWatch for more detail.
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