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Infographic: Index Funds for Beginners – A Simple Way to Start Investing
What are Index Funds? Explained Simply for Beginners
Index funds are the single best investment for beginners – and I’ll share everything you need to know to get started.
I passed the CFP® exam at 16 and have helped millions improve their finances over the last 8 years.
I’ll explain what index funds are without jargon, plus the 2 fund strategy designed especially for beginners.
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What is an Index Fund
An index fund holds hundreds or even thousands of stocks that make up a specific stock index, which is a set of companies that represent the entire stock market or sometimes a specific industry.
Instead of buying a few companies, buying an index fund lets you own a tiny piece of all of them at a fraction of the cost.
Most index funds come packaged as ETFs, or Exchange Traded Funds, which you can buy and sell instantly just like stocks. They also have low fees – usually under 0.1%.
Say you have $1,000 to invest. One share of an S&P 500 based index fund buys you a tiny slice of Apple, Microsoft, Amazon, and 497 other major American companies.
When one of them doesn’t do well, you barely feel it, because the remaining hundreds are still doing fine.
And because the stock market goes up around 11% per year in the long run, you get consistently high returns without needing to worry about picking individual stocks.
This is why index funds work so well for beginners.
Index Funds vs Picking Individual Stocks
The whole index sounds boring compared to choosing companies that you actually believe in.
Many people avoid the market entirely because investing feels like gambling, and that’s often because the news mostly covers crashes and corporate scandals.
But holding cash is the expensive choice here.
Imagine you’re 35 with $10,000 in a savings account at 3% interest. Thirty years later when you retire, that’ll be worth $24,000.
But if you invested the same $10,000 in an index fund, it would be worth $230,000 – almost 10 times more.
Best Index Funds for Beginners
The best investment for beginners comes down to just two index funds.
- VOO tracks the S&P 500, which includes the 500 largest US companies
- VEU covers international stocks outside the US, including emerging markets
Put 80% into VOO, and the remaining 20% into VEU.
You’re heavy on US stocks because they’ve delivered strong returns historically, and that 20% international slice means you’re not betting your whole future on just one country.
Set up an automatic investment into these two funds through your brokerage account. It’s that simple!
You might think paying some fund manager to beat the market is a better strategy than boring index funds, but you’d be surprised.
Why 90% of Active Fund Managers Lose
Many people assume professional fund managers beat the broad stock market. After all, if they’re getting paid that much, they have to be doing something right!
But while studying for the CFP® exam, I learned that over 90% of active fund managers get worse returns than index funds over the long run.
The stock market goes up around 11% per year in the long term, and owning the whole market captures all of it without a single hour of research on your part.
People see the word “average” and instantly think mediocre.
But that market average is the exact thing that almost every expert on Wall Street fails to beat, year after year – even after they charge very high fees.
So just use index funds and you’ll end up richer than the vast majority of people who are paying a fund manager to try and beat the market.
But even after knowing about the right investment, beginner investors are still making some easy-to-avoid mistakes.
Check this out to find out how to avoid 4 common beginner investing mistakes, and build more wealth over the long run: 4 Beginner Investing Mistakes That Are Quietly Costing You Thousands