Single Mom Index Investing

The Lowdown on Index Investing

When people talk about the stock market, they’re usually actually talking about a stock market index.

You hear about them on the news all the time: “The Dow was up 6 today.” “Today brought increases to the S&P 500 and the Nasdaq.” All three of those are stock market indexes, standards for tracking the U.S. stock market. But what does that really mean?

An index is really just a list of stocks put together to follow some or all of the market – that’s it. They’re the benchmarks, the yardsticks – what people use to measure investment performance.

Index funds – whether mutual funds or ETFs – are just what they sound like: a basket of all the stocks listed in an index. So an S&P 500 Index Fund would hold all of the stocks included in the S&P 500 index. And that style of investing comes with a lot of benefits for you…

Lower fees. Because these funds imply mirror their indexes, they don’t need a professional stock-picking portfolio manager on board – and that means they charge significantly lower fees. Lower fees means higher returns for you.

Better tax situation. On top of that, although they may occasionally rebalance the proportions of stocks in the index fund, there’s not a lot of trading in these funds. Managed funds, on the other hand, make huge numbers of trades – and every trade comes with a tax consequence for the mutual fund investors. That’s another advantage of index funds – fewer tax hits to deal with until you’re ready to sell your shares.

Better returns. The whole point of the more expensive managed funds is to beat the market, do better than market indexes. Guess what? They don’t – at least not most of the time. In fact, index funds post stronger returns more than 80% of the time.

So many choices. There are hundreds of market indexes, covering virtually every investment type and every world market. Investing in index funds won’t limit your options at all.

Index investing is a great way to dip your toe into the markets… and it’s also a good choice for investors who don’t want to put all of their energy into portfolio management. Sure, index funds – just like the markets as a whole – can see sharp declines, downward trends, and stalled growth… but (at least so far) the markets, and the indexes that track them, rebound and thrive, as long as you give them enough time.

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