Index funds are one of the best investments available to everyday people. They are simple, low-cost, and have outperformed most actively managed funds over the long term. If you are new to investing, index funds are the ideal starting point.
What Is an Index Fund?
An index fund is a type of investment fund that tracks a market index, such as the S&P 500. Instead of a fund manager picking individual stocks, the fund simply holds all the stocks in the index. This passive approach keeps costs low and delivers consistent, market-matching returns.
Why Index Funds Beat Most Active Funds
Research consistently shows that over a 10 to 20 year period, roughly 80 to 90 percent of actively managed funds underperform their benchmark index after fees. High management fees eat into returns year after year, making it very difficult for even skilled fund managers to outpace a simple index fund.
The Power of Low Expense Ratios
Expense ratios are the annual fees charged by a fund. Index funds typically charge between 0.03 and 0.20 percent per year. Actively managed funds often charge 0.5 to 1.5 percent or more. On a $50,000 investment over 30 years, that difference in fees can cost you tens of thousands of dollars in lost returns.
Popular Index Funds to Consider
Some of the most widely recommended index funds for beginners include Vanguard’s VTSAX (Total Stock Market Index Fund), Fidelity’s FZROX (Zero Total Market Index Fund with no expense ratio), and the SPDR S&P 500 ETF (SPY). These funds offer broad diversification across hundreds or thousands of companies in a single investment.
How to Buy Index Funds
Open a brokerage account with a reputable provider like Fidelity, Vanguard, or Charles Schwab. If your employer offers a 401(k), check if index funds are available — most plans include at least one. You can also open an IRA (Individual Retirement Account) for additional tax advantages. Once your account is funded, search for the index fund by name or ticker symbol and place a purchase order.
How Much Should You Invest?
Many index funds have no minimum investment requirement. You can start with as little as $1 with fractional shares. The most important thing is not how much you start with — it is that you start. Invest consistently every month, even in small amounts, and let compound growth do the heavy lifting over time.
Stay the Course During Market Downturns
Markets will go up and down. The biggest mistake new investors make is selling during a downturn out of fear. Historically, the S&P 500 has always recovered from every crash and gone on to reach new highs. Investors who stayed invested through the 2008 financial crisis and 2020 pandemic crash saw massive gains in the years that followed.
Index fund investing is not exciting, but it is proven. Start early, invest consistently, keep costs low, and let time work in your favor. That simple formula has made millions of ordinary people wealthy.