There are a lot of people who would like to get into investing, or becoming involved in a retirement plan, but are too intimidated by it.  They feel that it is a very difficult and financially risky.  There is a beginners level investment that you can do, that will produce better results than 95% of the mutual fund market, and that is to invest in index funds.

 

Defining indexes.   Indexes are a collection of stocks that are aimed to replicate the market that they represent.  For example, the S&P 500 Index attempts to reflect the 500 largest cap companies in the American Stock Market.  The Dow Jones Industrial Average on the other hand, is an accumulation of 30 different types of industries that are in the American economy.  General Motors represents the automotive sector of the economy for example, while JPMorgan Chase represents the banking sector.  The NASDAQ index is mostly involved in the technology sector.

 

Defining index funds.  Index funds attempt to emulate the index they are associated to.  When a particular index goes up, so does it's index fund, and when the index goes down, the index fund does as well.  Indexes and index funds follow each other pretty close, but not always 100% of the time.  There are many indexes that have an associated fund, however there are three main indexes that most people consider:

 

1.  Dow Jones Industrial Average (DJI)

2.  Standard and Poor's 500 ($SPX, although also goes by other symbols)

3.  NASDAQ (QQQQ)

 

How do you make 95% more than most mutual funds?  The benchmark for many years has been the S&P 500.  Often, a mutual fund will compare itself to the S&P 500 by telling us "we've beat the S&P 500 3 years out of the last 5 years".  Many mutual funds and managed funds can outperform the S&P 500 in the short term.  Retirement funds and most other types of investments however are long term, and can best be maximized by investing without planning to time in and out of the market.

 

How to start investing in index funds.  You have two ways to invest in mutual funds.  Since this is a lesson for a newbie who would like to get in fast, the best method would be to go to a mutual fund company.  Almost every mutual fund company in the country carries index funds, and typically they have a "no load" option, which means that they do not make a percentage off of it like they would with other investments.  Another option would be to get a trading account, and actually buy these on the open market.  The problem with this however, is that they tend to have a load, therefore you will lose money over the mutual fund.  Buying from a mutual fund company will also give you a representative that you can talk to, and discuss other investments with.

 

Other options to index funds.  There are other options to index funds, such as the theory of Asset Allocation.  This is the concept of buying multiple funds from a mutual fund company, investing a certain percentage in each fund throughout the year, and once a year rebalancing the portfolio.  This has been shown in many cases to outperform index fund investing, but are for more advanced investors. 

 

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