Index Investing For Beginners – Your Complete Guide

Everyone should be investing in some capacity if they can. Whether it’s through a 401(k), a Roth IRA, real estate with help from Fundrise, or just a personal brokerage account, investing is one of the best things you can do for yourself! 

Why Investing Works

Magic piggy bank examples aside, investing just works. It works for one simple reason: compounding returns. 

What Is Index Investing?

Index investing is the process of investing in index funds. Not surprisingly, an index fund is the combination of an index and a mutual fund

Putting It Together

An index fund is a mutual fund, except instead of having a manager pick stocks to invest the collective funds in, the funds are invested in an index. 

Why Index Investing Is So Great For Beginner

Index investing is great for beginners for countless reasons, but here are the top 4 in my book: 

1. It’s Easy

Investing in index funds is simple and extremely hard to mess up, which makes it great for beginners. Once you buy a few (or even just one) index funds, you can “set it and forget it”… for the most part. 

2. You Get Broad Diversification

As already described, with an index fund you get broad diversification with just one purchase. There is no need to buy a huge number of individual stocks because your one index fund did that for you! 

3. It’s Extremely Affordable

Index funds are affordable for a few reasons, but mainly because they have low expense ratios. We’ll focus on comparing costs to classic mutual funds since that is the index fund’s “main competitor” so to speak. 

4. The Strategy Is Proven

Last, but certainly not least, the index investing strategy has been proven to work over the years. The S&P 500 (an oft-cited index) has historically returned +7% annually. $10,000 invested today would be worth $138,426 in 40 years at that rate (also assuming a 0.03% expense ratio).  

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