Investing in the stock market can be an excellent way to build wealth over time. However, the prospect of investing can be daunting, particularly for those who are new to the world of finance. The good news is that there are numerous index funds available that offer a straightforward way to invest in the stock market. Index funds follow a specific market index, such as the S&P 500, and offer exposure to a diverse set of stocks. These funds are low-cost, diverse, and simple to understand, making them ideal for new investors. In this article, we'll take a closer look at some of the best index funds to invest in for beginner investors and why they can be a great starting point for anyone looking to build a long-term investment portfolio.
What are Index Funds?
Index funds are a type of investment fund that seeks to track the performance of a specific market index, such as the S&P 500, by holding a basket of stocks that reflect the components of that index.
The Three Main Indexes
S&P 500 - tracks the 500 largest publicly traded companies in the United States
Nasdaq Composite - featuring over 3000 stocks, heavily invested in tech which makes up more than 50% of the index.
Dow Jones Industrial Average - tracks the performance of the 30 large publicly traded companies in the United States.
Index funds offer investors a simple, low-cost, and diversified way to invest in the stock market. They are typically managed passively, meaning that their portfolio is not actively managed, but instead seeks to match the performance of the underlying index. This passive management style results in lower fees compared to actively managed funds, making index funds an attractive option for beginner and experienced investors alike. The primary benefit of investing in index funds is the ability to gain exposure to a broad range of stocks, reducing the risk of investing in a single stock or a narrow group of stocks.
Why you should invest in index funds?
There are several reasons you should consider investing in index funds, especially as a beginner investor.
Diversification
Index funds offer outstanding diversification. Instead of having to purchase multiple stocks one by one and balancing your portfolio, you can purchase it all in one stock.
Low Cost
The average index fund costs 0.06%, costing you $0.60 for every $1000. That is very small compared to ETFs which charge 0.16% and mutual funds between 0.25%-1.00%.
The higher fees for mutual funds aren't worth it. According to New York Times, "For example, the last time the average active U.S. stock fund beat the S&P 500 stock index for a full calendar year was in 2009. And over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks."
Not to mention the compounding costs of the fees, mutual funds are simply not worth it. Index funds offer higher returns and lower costs.
Convenient
Everyone has busy lives and not enough time to spare to research companies and keep up with the world, economics, and company updates. Index funds do all the hard work for you and keep your money working for you. Index funds are constantly updated to weigh in each stock according to their index. If the stock market is up, then you're up. If the stock market is down, then you're down. It's as simple as that.
Track Record
The first index fund came out in August 1976 by Vanguard. Since then, index funds have grown in popularity and are held by almost every retiree account. Index funds have returned tremendous value to investors. The S&P index 500 was able to return an average of 10.7% yearly compounded. $10,000 compounded at this rate with no additional money invested would result in $211,071.03. All thanks to index funds, any investor can put their money to work.
Long-Term Investment
Index funds are meant to be for long-term investing. In the short term, you won't see much results, but with the power of compounding your account will be able to grow much faster.
Back to the example of $10,000 compounded at 10.7%
Years | Ending Balance |
10 | $27,636.07 |
20 | $76,375.21 |
30 | $211,071.03 |
40 | $583,317.27 |
50 | $1,612,059.41 |
The longer you wait, the more your money gets compounded! Shocker! Money gets compounded on your new balance. You should expect way more in the future because you'll be investing consistently, in addition to your principal investment of $10,000.
If you contributed $300 every month to your principal of $10,000
Years | Ending Balance |
10 | $86,972.36 |
20 | $299,693.67 |
30 | $887,571.69 |
40 | $2,512,235.19 |
50 | $7,002,165.85 |
It's important to contribute to your account to reach the full potential of it growing!
Passive
Index fund investing is completely passive. All you do is put your money into the fund and the portfolio tracking one of the indexes. Everything is automated and restructured to always keep a balanced fund. You can sit back and relax while the money is working for you.
Low Risk
Index funds carry risk just like any other investment, but it is relatively low risk. Index funds track the performance of several stocks. So, if one stock falls 50%, your portfolio doesn't move down 50%. Index funds have heavy volume (number of shares traded) but aren't volatile. Prices usually only move low single digits daily, but some events trigger huge price movements.
October 19, also known as Black Monday was the biggest drop in the S&P 500's history resulting in a 20.47% drop. This drop represents a low risk because, in S&P 500's timeline, it was only able to drop at most 20.47%. Other investments have the potential to fall to 0. That will almost be impossible for index funds because if they fall to 0, then the stock market falls to 0, then the economy falls to 0, then the country collapses. So, the last thing you'll worry about is money at that point.
Index funds are low-risk and create a diversified portfolio for the long term.
Did you know you can get paid to buy stocks?
Learn more about cash-secured puts and how to take advantage of a simple tactic to earn money to purchase your index fund at "Get Paid to Buy Stocks: Cash Secured Puts"
Best Index Funds to Invest
1. VOO - Vanguard 500 Index Fund ETF
VOO index fund closely tracks the S&P 500. It came out in late 2010 and gave investors a low-cost investment option. VOO's expense ratio is only 0.03% which means it will cost you $3 for every $10,000 invested.
VOO has returned 56.86% in the past 5 years and has a dividend yield of 1.57%.
Learn more about VOO on their website.
2. DIA - SPDR® Dow Jones® Industrial Average ETF Trust
DIA index fund is the only fund that tracks the Dow Jones. DIA expense ratio is 0.16%, which means it will cost you $16 for every $10,000 invested.
DIA has returned 39.84% in the past 5 years and has a dividend yield of 1.87%.
Learn more about DIA on their website.
3. QQQ - Invesco QQQ Trust Series 1
QQQ index fund tracks Nasdaq 100 index. QQQ expense ratio is 0.20%, which means it will cost you $20 for every $10,000 invested.
QQQ has returned 94.48% in the past 5 years and has a dividend yield of 0.70%.
Learn more about QQQ on their website.
Conclusion
In conclusion, index funds can be a great place to start for new investors looking to build a long-term investment portfolio. These funds offer broad stock exposure at low costs and are simple to understand, making them a convenient and low-risk option. Index funds are worth considering if you are new to investing or looking to diversify your portfolio. If you're unsure about which funds to invest in, as with any investment, do your research and seek advice from a financial professional. You can potentially grow your wealth over time by using a long-term investment strategy and a well-diversified portfolio of index funds.