What Exactly Is An Index Fund?

An Index Fund or ETF (exchange-traded fund) is a type of mutual fund that tracks the performance of a specific market benchmark or “index,” as closely as possible.

An example of one of these index funds would be the S&P 500, where the fund’s manager buys a representative sample of the stocks and bonds in the index it tracks.

Big name investors like Warren Buffett have praised index funds as being safe havens for money, especially in the sunset years of your life, he has even recommended it for the average investor over picking individual stocks.

The cost is generally much lower when using an index fund because the fund manager isn’t actively picking stocks and they aren’t trying to time the market. It’s a steady and passive form of investing.

And this low amount of activity is why it’s so safe to invest in. Occasionally the fund manager will rebalance the portfolio so no single stock has too much influence over the fund as a whole.

Diversification is one of the most highly recommended ways to keep your money safe when investing and index funds offer the ultimate in diversification.

You will not be paying high management fees when investing in an index fund so a big chunk your gains won’t get eaten up year after year.

If you are a long-term investor, then this method of investing is for you.

Even though index funds lose to over 1/3rd of actively managed funds in the short term (1 year), over the long term (10 years) index funds like the S&P 500 outperform 87% percent of all (around 8,000) actively managed mutual funds.

If you want to take a bet on which actively managed mutual fund will beat most indexes, go ahead, but the potential loss and the odds of that actually happening make it a bad bet in my opinion.

The only cons I can think of with investing in index funds is that they are very beholden to the market, let’s say you are ready to retire but the market is currently in…

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