00:00 Start Here 00:42 What is an index fund? 01:50 How an index fund works 02:53 The Pros of Index Funds 04:27 The Cons of Index Funds 06:30 Choosing The Right Index Fund 09:44 Opening A Brokerage Account 11:02 Buying An Index Fund
The best way to grow your money in the stock market is through what Warren Buffet calls, "His favorite investment" or index funds. In this video, I explain everything you need to know about investing in index funds.
What is an index fund?
In order to understand what an index fund is, it's best to first understand what a stock is. When you buy a stock, you are buying a single company that is represented by a ticker symbol like Apple or AAPL. Whereas when you buy an index fund, you are buying one fund that is composed of a diverse group of stocks that tracks a market index like the SP500.
How an index fund works
Understanding how an index fund works is very simple. An index fund simply mirrors a market index like the SP500. So whatever the market index produces, the index fund will also produce. For example, if the SP500 goes up 1%, then the your index fund will also go up 1%.
The Pros of Index Funds
There are pros and cons to index investing and first let's talk about the pros. The first pro is that it is a lower risk investment. Instead of the performance being based on a single company like a stock is, it is based on a diverse portfolio of stocks. The second pro is long term growth potential. In the long term, the market has averaged a 10% return a year, and although this is not guaranteed, the potential of getting a return on your investment is very high. The third pro is it is a passive investment. Index investing does not require any work from you. All you have to do is simply buy and hold.
The Cons of Index Funds
Although index funds are a great investment, they do come with some cons. The first con is that you will not beat the market. If you are trying to beat the market, which is very difficult, you will not do it through index investing. The second con is slow growth. Building wealth through index investing takes time and if you are trying to do it quicker, you have to chose another investment. The third con is it's boring. If you are trying to get a thrill through investing, you will not get it as index investing is a passive form of investing.
Choosing The Right Index Fund
In theory all index funds should perform the exact same because they are all tracking the same index (in the case of this video, the SP500). However, there are some things you want to consider when deciding which one to choose. The first thing to consider is the minimum investment amount. Depending on how much money you have, it could limit which funds you can buy. The second thing is a transaction fee. Normally, if you buy an index fund outside your brokerage, you will encounter a fee. That said, whatever index fund you choose, should also be your broker. The third thing is the expenditure ratio. You do have to pay a small fee, but strive to keep this fee under .05%. The final thing is if it is an index fund or an ETF. ETFs are very similar to index funds, so make sure you are not buying an ETF.
Opening A Brokerage Account
Once you decide which index fund you want to index with, next you need to open a brokerage account or investment account. Simply go to Charles Schwab, Vanguard, or Fidelity and open an account.
Buying An Index Fund
Once you open a brokerage account, you can finally buy an index fund and begin investing. In the video, I show you how to buy one using the Schwab interface.
**This video is intended for entertainment purposes only, none of it should be interpreted as financial advice. Links above are affiliate links where if you click and order, I will receive a commission at no cost to you. **
