So before we get started, we want to Define 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 and index funds are interchangeable, that they’re the same things, but they are not. Index Fund is just one type of mutual fund.
So what’s so unique about an index fund is? It is a setup 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’s 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. The Idea was rather than trying to beat the market, why not create something that would mimic the market open. He had some haters as soon as he said he had invented the index fund, an idea which was as simple as it seemed. 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 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, 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.
S&P500 focuses on the top 500 companies on the stock market, whereas the total stock market gets them all. Meaning he gets the small ones, and it gets the big ones. This is the main difference between S&P 500 Index Fund and any Total stock market index fund.
Now when it comes down to the preference of 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. Always take a look at their expense ratios, customer service because they may be holding millions of your dollars, and you want that relationship. So if you’re interested in investing in an index fund, make sure that you research well to invest wisely.