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Beginner’s Guide to Index Funds

If your goal is attain financial freedom, investing should be part of your plan. If you’re like most people (including me), investing might be intimidating. Investing can require a lot of time and a lot of knowledge.

Thankfully, you don’t need to be a financial genius to receive the benefit from investing in the stock market. All you need to do is invest in index funds.

What are index funds?

Index funds are collective investments that aim to replicate the movements of an index of a specific financial market. Thus, you can have an index fund geared toward the technology sector, international sector, ect. There are even index funds geared to match the S&P 500.

What’s the difference between index funds and mutual funds?

The main difference between index funds and mutual funds is that mutual funds are actively managed and index funds aren’t. Actively managed means a fund manager, using his knowledge of the market, selects stocks and tries to time the market in order to get the best return. Index funds just try to mirror the market.

What are the benefits of index funds over mutual funds?

  1. They have low costs. Because there’s no fund manager tinkering with the fund, index funds have very low costs. Thus, you keep more of the money you earn when investing.
  2. They perform better than most mutual funds. Roughly two thirds of all actively managed funds fail to beat index funds.
  3. They’re low maintenance.

The key to success with index funds is consistency. You have to keep investing in them, even if the market turns sour. If the market takes big hit, keep buying. The market always rebounds and will outperform itself in the long run.

A good index fund that many people suggest buying is Vanguard Total Stock Market Index. The problem is that an initial investment will set you back $3,000. Most students probably don’t have that kind of money to throw around. If you’re not in a position to invest, make it goal to get there as soon as possible.

For more information on index funds check out these great posts from other personal finance bloggers.