Finances in 55 Seconds: Choosing an Index Fund

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One of the ways that you can diversify your portfolio, while at the same time limiting some of your risks, is to invest in index funds. An index fund is a group of investments that follows a specific index. If you invest in an all market index fund, then you get a little share of everything on the stock market. There are funds that follow the S&P 500. You can find index funds that follow specialty indexes, such as those for alternative energy, or small business. You can even find index funds for bonds and other investments.

While investing in index funds isn’t everything, this strategy can provide you with a way to earn market returns, pay low fees (index funds cost much less than actively managed mutual funds), and build up your nest egg. Choosing index funds, though, can be somewhat daunting. If you have a little less than a minute, though, you can get a head start on the process:

  1. Decide what you want the index fund for: You need to know what you hope to accomplish with the index fund. Do you want rapid, short-term growth? Are you looking for more steady, long-term growth, as for a retirement account? Perhaps you want an income fund that you can use for passive income streams. Consider, too, that there are risks involved with different index funds; you could always experience losses, and if you are looking for more dramatic growth, there is a great chance of loss. (Time: 17 seconds)
  2. Check into different index funds: Once you know your purposes, you can then check into different index funds. There are a number of web sites out there that provide quick overviews of different funds, even putting them into categories such as growth and income. Look at a respected site, like Morningstar and Vanguard to find information on different funds in different categories. (Time: 34 seconds)
  3. Make your choice: Once you have a the chance to get an idea of what is available to you, you can make a choice about which two or three index funds are most likely to meet your needs. (Time: 4 seconds)

It is important to note, though, that 55 seconds is insufficient to make an informed decision about an index fund — or any investment. The point of this exercise is to kick things off quickly, helping you get the process started. Sometimes what you need to get going is a swift start. This exercise will force you to think about what you want in an index fund, and get you started looking at funds that are available.

While you shouldn’t commit to something in 55 seconds, you can quickly get an idea of what’s there, and narrow your choices down to a two or three funds to investigate further. You can then spend a few minutes to compare expenses, past performance, and the investments in the fund. You can decide whether funds are likely to provide you with the best value for your investment buck, and then make your final decision after a little more deliberation.

{ 7 comments, please add your thoughts now! }

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7 Responses to “Finances in 55 Seconds: Choosing an Index Fund”

  1. The big problem with index funds is they only work in bull markets. The record for broad index funds is dismal for over a decade.

    Indexing has several problems and one fatal flaw. An index becomes overweighted with stocks that have done well and underweighted in stocks that have gone down. Therefore by owning the index you may own a larger percentage of stocks with high valuations and a smaller percentage of stocks that may be good valuations or bargains.

    If you want to own the best stock you must do research or hire someone who can help with your research. There are no easy ways to make money and indexing has proven that the past 11 years!
    Ken Faulkenberry

  2. joe says:

    Not all index funds are the same, they may track the same index but their feescan changetheir performance@!

    • billsnider says:

      Look at total returns, not fees.

      The fact is that almost all index funds have done poorly relative to stock funds over the last ten years.

      To prove this go to a Fidelity , Vanguard or some other large fund family. Look at the ratings over 1, 3, 5 and 10 years. Eliminate bond, time dated, balanced, money market and municipal bond funds (look at stock funds only). Rank the rturns.

      You will be surprised at how bad they have done.

      I agree with Ken Faulkenberry that they only do well in big bull markets. They got the myth of invincibility iring the bull run of the 90’s.

      Bill Snider

  3. Ross says:

    I see index fund investing as a type of “gateway investment”. It’s fairly general, not one of the most complicated investment options out there, and like you said, the fees are generally low.
    As soon as all of my debt is completly paid off, this will be where my investing begins.

    • billsnider says:

      Think twice about going to index funds. They should be part of your diversification plan, not “THE” plan.

      Also don’t get hung up with fees. It is only part of the equation.

      Bill Snider

  4. skylog says:

    not so much index funds, but i do have two vanguard etf’s for specific international exposure that i want in my portfolio. the main advantage (with the index funds and etf’s), as i see it, are the rock bottom fees.

    i have been back and forth in my head dozens of times regarding the active versus passive management argument, but i still have not made the move to index funds. i have seen data from both sides that puts their side ahead, but i am just not willing to give up what has been working for me.

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