So before we get started, we want to Define what an index fund. So index one is a portfolio that traps different stocks, bonds, and other securities, and an index fund is a type of mutual fund, but that’s where it ends. Many people think mutual funds, index funds are interchangeable that they’re the same things, but they are not in Index Fund is just one type of mutual fund.
So what’s so unique about an index fund is? It is set up to match an index or track a particular market and other mutual funds, not index funds. They are different because instead of trying to match the market, they are trying to create one. This difference between an index fund and a mutual fund is critical. After all, the sole purpose of a mutual fund is to beat the market. On the other hand, the sole purpose of an index fund is to match the market or match whatever sector it is set up to track.
That brings us to our history lesson for the day. You see, it is crucial to understand your history when you are investing, and history when it comes to investing is a powerful tool. So index fund started in 1975 and was invented by Jack Bogle, the founder of Vanguard. For 1975 the only way you could invest in a batch of stocks was through mutual funds. The problem with this was that mutual funds could barely beat the market. So Jack Bogle came up with this earth-shattering groundbreaking idea, which was rather than trying to beat the market, why not create something that would mimic the market open. He has some haters because as soon as he said he had invented the index fund and his idea as simple as it was. It meant that you did not need the mutual fund manager, and even today still have few Index Fund haters. Because how can you justify charging people an unreasonably high amount of money to manage a mutual fund when the index fund is being so easy.
By creating the index fund, a long chain of events occurred.
First, You no longer need an individual to manage the fund.
Second, it cuts out all of these costs become a lot lower.
Third, It’s better performance because you’re tracking the market and this is the best part.
It made it easier for individuals, regular investors to invest in the stock market. You see, there are thousands of mutual funds and thousands of mutual fund managers. And so it is difficult to pick who is the best mutual fund manager who is going to be the All-Star here when it comes to investing in the market, but if you are trying to mimic the market to match the market, you pick the index this as a test.
That brings us to our style of investing. You see, index fund investing is a long-term investment. Whereas with mutual fund investing, you must be more speculative because when you invest with a mutual fund, your mutual fund manager will have the right picks this year in, year out. But when you are investing in index funds, what you are saying is that you believe in the history of the historical run of the stock market always going up.
Although Index Fund is long-term and somewhat automatic, you still have to research and determine what type of index fund you want to invest in.
The difference between S&P 500 Index Fund and any Total stock market index fund is, S&P500 focuses on the top 500 companies on the stock market, whereas a total stock market gets them all. Meaning he gets the small ones, and it gets the big ones.
Now when it comes down to the preference that you have when picking the Broker from whom you’re going to buy your total stock market index fund or S&P500 Index, because brokerage is the most important thing as well. You need to be able to feel comfortable investing with that company. So take a look at the expense ratios, take a look at their customer service because they may be holding millions of your dollars, and you want that relationship. So for you, if you’re interested in investing in an index fund, make sure that you research so that you know how to invest wisely.