You’ve finally gotten your finances together and you’re ready to invest for the first time, but what should you invest in? There are many schools of thought and the advice you get will probably vary with just about every person that you talk to. For me, one of the smartest investments you can make as a beginner is to invest in index funds. Index funds are a low-cost option that aims to duplicate a certain market index. Over the long run the market has shown to provide better returns than most high-priced actively managed mutual funds, and the additional cost savings from the lower expense ratios provides for higher returns.
Fool.com has a great synopsis of the history of index funds, and it goes to show how powerful they can be. For the beginning investor, index funds provide the diversity of a mutual fund at a lower cost so that you don’t have to be an expert to find a place to put your money. Over time, as you gain your knowledge, you can try to expand your portfolio into more complicated investing strategies. Even so, I would think an experienced investor can find benefit in investing in an index fund of some kind.
Some common index fund types center around the S&P 500, the total stock market, large and small cap funds, foreign companies, and many more. That way you can still put your money into the areas of the market that interest you like you would with regular mutual funds or a personal stock portfolio. The only real difference is that the index fund isn’t actively managed by a fund manager (like a lot of higher cost mutual funds) and the aim of the index fund is to match the return and/or behavior of the index it’s mimicking. Some critics claim that you could be putting your money to better use and earn even more if you get an actively managed fund, but the results over the past 30 years or so seem to imply otherwise for most funds.
Some of the most popular index funds belong to Vanguard and T. Rowe Price due to their solid performance and extremely low expense ratios. The Vanguard 500 Index (VFINX) is the most popular of all and is considered a cornerstone to many a smart investor’s portfolio. In the end, index funds make it easy for a novice to make a smart decision with their money. Chances are even after you’re an experienced investor you’ll still find yourself with some index fund holdings, as they are a solid choice of value over cost.
