Investing in the stock market is one of the best ways to save for your future. The long-term returns of the market are higher than any typical savings account. One of the easiest ways to get started investing is through index funds. Here’s what you should know.
What is an Index Fund?
Index funds are investment funds that follow a benchmark index, the most popular being the S&P 500. The “500” in the S&P 500 is because it tracks the performance of the 500 biggest companies in the nation. When you decide to invest in that index fund, the money is invested in all those different companies. That automatically diversifies your portfolio, which in turn lowers your overall risk.
- Higher Returns. The return on investment (ROI) for index funds is potentially quite higher than a typical savings account. Though credit unions often have great offers for their savings accounts, the average interest rate for savings accounts right now is about .53 percent. Meanwhile, the average return for index funds is a whopping 10 percent.
- Lower Fees. Index funds simply track an index, so there is less of a need for a team of fund managers constantly making trades. That means the fees associated with investing (called the “expense ratio”) are quite low compared to actively managed investments like some mutual funds.
How to Invest in Index Funds
To get started with index funds, you’ll need to open a brokerage account, a traditional IRA, or a Roth IRA. The other option is may have is to invest in index funds in your 401(k). One easy way to get going is to use a robo-advisor, like WealthFront or Betterment, that does a lot of the work for you. They also have lower fees than traditional advisors because they use algorithms to manage investments.