I believe that the best way to start investing is with index funds. They’re particularly great for new investors since they take the guesswork out of where you should put your money. After all, an index fund simply mirrors how its respective stock market index behaves; by taking a look at the behavior of the S & P 500, Dow Jones and the Nasdaq index, you’ll have a great idea about how your money will do if you happen to invest in funds that reflect their make up.

Most fund managers will try to beat the index, but unfortunately, too many of them fail. As consumers, it’s reasonable for us to expect to earn a rate of return that matches the index since most experts we entrust our money to simply cannot beat market returns consistently over the long term. If you’re somehow able to manage market returns, then you’re doing much, much better than what most professionals are able to achieve with their managed funds. Now it’s ironic that this is the case since index funds don’t have managers like actively managed mutual funds do. This means that the overall cost of having an index fund is going to be cheaper for you because there is no manager that must be paid.

How To Invest In Index Funds

Now that you know that index funds are cheaper and are based upon certain well known market indexes, you are probably wondering about how to invest your savings in these funds.

Here’s an easy way to start: check out your 401K options at work — most companies will offer their employees several fund choices as part of their retirement plan, and will introduce them to the popular S & P 500 index fund. If you need a little more information on the S & P 500, here’s a simple description: this stock market index is comprised of 500 common stocks and also tracks their performance in aggregate. The performance of the S & P 500 is a popular benchmark for the overall performance of the U.S. stock market. Other indexes work in the same way, but they may use other stock criteria to create their benchmark. Many bigger indexes do exist and are represented by even more diversified index funds.

If you don’t have a lot of time or money to invest, you can look into building a retirement portfolio using what’s easily available to you. As mentioned, it may be convenient for you to begin investing through your 401k account (or some similar employment retirement account). In this case, you’re best served by a simple index fund that represents the U.S. market (either an S & P index fund or a Total Stock Market Index fund). But if you have some time to devote to investing activities, then you may want to consider performing some research to develop your own asset allocation, which refers to how you are going to diversify your investments. You may wish to earmark your investment funds as follows:

• 30% in large company equities
• 15% in small company equities
• 15% in large foreign company stocks
• 10% in small foreign company stocks
• 10% in a bond index fund
• 10% in cash
• 10% in a gold index fund or ETF

Most asset allocation set ups are more sophisticated than this, as they include other asset classes such as foreign bonds and other fixed income investments, real estate, other types of precious metals and even commodities.

In order to find the right funds in each area (asset class), you’ll need to do some research. Find the funds that have the lower expense ratios (Vanguard is one of the cheapest mutual fund companies around). By doing so, you won’t have to pay so much to own the fund. You may want to first invest in domestic funds and then move on to foreign funds, just to get the hang of it.

How To Invest In Index Funds is a post from: Investing Toolkit

A lot of people who are new to investing may not be too sure what an index actually represents. When you hear the media talk about the behavior of the stock market in terms of points that go up and down on a daily basis, well they’re talking about how an index behaves right there — whether it be the Dow Jones Industrial Average, the S & P 500, the Nasdaq or something else.

So What’s A Stock Market Index?

What a stock market index is, is simply a measure of the discrepancies in a stock portfolio that represents a piece of the stock market. Since it’s pretty much impossible to keep track of every thing that’s traded in the markets, this measure was invented to represent a smaller sampling that would ultimately reflect the bigger picture. Sounds simple enough? We can measure the health of the markets by simply checking on how its representative indexes are doing. The bottom line here is that index price changes reflect the exact proportional changes in the prices of stocks that are part of the index.

I found it interesting that indexes can be whipped up by just about anyone (or any financial body). For example, during crazy bull markets of yore, everyone and their brother would formulate new indexes that were “marketed” and introduced to investors. Remember those internet dot com stock indexes or new economy stocks that were pretty hot at one point? While new indexes can come and go, I’d only pay attention to those indexes that have managed to stick around and which have been developed by reputable, upstanding financial companies such as Dow Jones & Company, the folks who publish the Wall Street Journal. They’re the ones responsible for the DJIA, the granddaddy of all indexes.

Index Funds, ETFs and the Indexes They Track

If you’re like me, then you must love index funds and index ETFs. Index funds and ETFs track their benchmark indexes. For some examples, here are a few that I like and the indexes they represent:

• The DIA (Dow Diamonds) ETF tracks the Dow Jones Industrial Index.
• E*Trade S & P 500 Index Fund (ETSPX) tracks the Standard & Poor’s 500 Index.
• Fidelity Nasdaq Composite Index Fund (FNCMX) tracks the Nasdaq Composite Index.
• Russell 2000 Index Fund (IWM) tracks the Russell 2000 Index (small cap stocks).
• Vanguard Total Stock Market Index Fund (VTSMX) tracks the Wilshire 5000 Total Market Index. The Wilshire 5000 is supposed to represent the entire U.S. stock market.
• The MSCI EAFE Index Fund (EFA) tracks the MSCI EAFE Index.
• Vanguard Total Bond Market Index (VBMFX) tracks the Barclays US Aggregate Bond Index.

Here’s the thing: there are a lot of index funds and possibly ETFs that are available from various financial institutions which do the job of following these indexes. Vanguard, the largest and most well-known mutual fund company (and low cost fund house due to their emphasis on indexing) certainly has many index fund choices you may want to review if you’re interested in getting into indexing. These financial vehicles are some of the lowest cost (if not the lowest cost) investments you can possibly get into, as a small investor. They’re definitely a part of my core portfolio and have served me extremely well throughout the years!

What’s A Stock Market Index? is a post from: Investing Toolkit