If you’re somewhat familiar with personal finance and investing, then you have likely heard about the beauty of index funds. And for good reason. They are an easy way to start investing, and generally have great returns.
Index funds work like this: instead of purchasing individual stocks, an investor can buy an index fund. An index fund contains an array of diversified stocks and bonds. Index funds are easy to self-manage, meaning you don’t have to pay someone to actively manage your stocks. Ultimately, this results in higher investment returns for you, the investor.
If you’re a little overwhelmed, don’t worry about it. Index funds are easy to buy, even for beginners. Here is everything you need to know about picking and purchasing index funds.
Decide where to purchase funds
First, you will want to decide where you are going to purchase funds. You can purchase index funds from a brokerage firm. Some popular brokerage firms include Vanguard, Charles Schwab, TD Ameritrade, Fidelity, and Ally Financial, just to name a few.
What are the differences between brokerages? There are a few things you will want to consider. First, you will want to compare the fund selection between every brokerage. Some companies will offer more limited funds than others.
Next, look at the costs associated with your index funds. Do they charge you fees for every transaction, or is it fee-free? Are there trading costs associated with it? Those little expenses can add up if you’re not careful, so choose a low-cost option.
Finally, choose the provider that you’re generally comfortable with. For instance, make sure you understand how to maneuver their website. You may want to go with a company that provides easy to use calculators and price comparisons. The more comfortable you are with your brokerage, the more likely you are to continue to learn about your investments.
Choose your index fund
Now that you have a brokerage account, the next step is to actually pick your index funds. Each index fund contains various companies and industries. One of the most common index funds is the Standard & Poor 500, or the S&P 500. It contains 500 companies based in the United States.
While the S&P 500 is one of the most popular funds, there are plenty of other index funds available. When considering index funds, you will want to consider the following:
- Company size. Plenty of index funds are based on company size. Index funds that track small companies are called small-cap indexes. Medium and large companies are called mid-cap and large-cap indexes, respectively.
- Type of industry. Have a preference on the type of market you invest in? For instance, if you want to invest specifically in tech, you may want to choose a fund such as the Vanguard Information Technology fund. However, keep in mind that investing in just one industry can be riskier than diversifying your funds.
- Location. Want U.S. based companies? International companies? You can purchase index funds based on geography.
Remember, you can always customize your fund allocation if you want to invest in more than one specific type of fund.
Compare financial obligations
While index funds are fairly low-cost overall, you will still want to compare the costs and fund requirements to ensure you are getting the most bang for your buck.
Index funds are not actively managed by a financial advisor, which helps to keep the costs down. However, you will still face administrative fees. These fees are taken out of your returns. So when you’re first getting started with investing, it may not seem like much money. But as your funds grow, the fees associated with your account can quickly become burdensome.
Along with costs, you will also want to consider the minimum investment amount. As you are growing your account, this number is key. For instance, if you can only invest $1,000 at a time, you may want to look for an account with a lower investment minimum.
Lastly, you will need to look at the account minimum, or how much you need in order to open an account.
Popular index funds
Picking the right index fund really depends on your individual priorities as an investor. But to get you started, here are a few of the most popular index funds in 2019, according to The Motley Fool.
- SPDR S&P 500 ETF. Focus: S&P 500. Expense ratio: 0.09%.
- Vanguard Total Stock Market ETF. Focus: Total U.S. market. Expense ratio: 0.04%.
- Vanguard Total World Stock ETF. Focus: Total world market. Expense ratio: 0.10%.
- Schwab U.S. Mid-Cap ETF. Focus: Mid-cap stocks. Expense ratio: 0.05%.
- iShares Core S&P Small-Cap ETF. Focus: Small-cap stocks. Expense ratio: 0.07%.
- Vanguard REIT Index Fund. Focus: Real estate investment trusts. Expense ratio: 0.26%.
- Vanguard Intermediate-Term Bond ETF. Focus: Intermediate-term bonds. Expense ratio: 0.07%.
- Schwab U.S. Aggregate Bond ETF. Focus: Total bond market. Expense ratio: 0.04%.
Have you started investing in index funds? What tips do you have? What questions do you have about index funds?
Check out some of our favorite personal finance resources:
Are you getting the best credit card rewards? Check out the top cash back credit card offers (updated daily)
Make extra money: 15 ways to make money from your computer
Get the First Chapter Free!
Join our online community and get the first chapter of the book Student Loan Solution absolutely FREE!
interesting :D