Investing 101

What is index investing?

Index investing involves investing in assets tied to a market index with the goal of mirroring its performance. It offers potential benefits such as lower costs, diversification, and efficiency. However, it does not aim to outperform the market or respond to short-term fluctuations. Fund managers purchase stocks to closely match the index’s performance using a passive investment approach.

Key takeaways

  • 01

    Know the potential benefits

    Index investing usually has lower fees, can give you broad market exposure and help spread your risk around, and doesn’t involve making frequent trades to change your position.

  • 02

    Understand how it’s different

    Your savings won’t be adjusted by a manager toward different investment allocations when there are market fluctuations and it won’t seek extra returns like active strategies that could boost your savings further.

  • 03

    Learn how it works

    You aren’t investing your money in an index itself, such as the S&P 500, but rather tracking the performance of a group of stocks. Index fund managers will buy shares of every company listed on the index, or at least a representative sample, to help accomplish that goal.

Index investing for retirement

What is index investing?

When you save for retirement, you also have to decide how to invest your savings. One option for long-term investing is index investing, which involves investing in the assets associated with an index seeking to mirror its performance. These indexes are typically groups of stocks or bonds, with some of the more familiar ones being the S&P 500 and the Dow Jones Industrial Average.

The goal of the strategy is to replicate a market and capture the returns of an index as closely as possible. It is also a way to invest with relatively low fees so that more of the returns are yours to keep. A different approach is taken with active investing where managers seek to earn higher returns compared to the index.

Potential benefits of index investing

Low cost index investing

Lower cost

Since index investing is efficient and doesn’t require extra research, it usually has lower fees. Over the long run, that means you may be able to keep more of your money.
index investing Diversification

Diversification

By investing more broadly instead of picking individual stocks to bet on, index funds can give you broad market exposure and help spread your risk around.
index investing efficiency

Tax efficiency

The strategy doesn’t generally involve making frequent trades, resulting in lower costs and fewer taxable capital gains distributions.

Potential considerations with index investing

Read more about Market factors not considered

Market factors not considered

When there are fluctuations in the market, your savings won’t be adjusted by a manager towards different investments in order to avoid loss or seek gains.
Read more about Doesn’t seek to outperform

Doesn’t seek to outperform

Index investing aims to capture the average returns of the market. Unlike active strategies, it won’t seek extra returns that could boost your savings further.
Wrap up

Frequently asked questions

  • Index investing involves investing in assets associated with a market index, like the S&P 500, seeking to mirror its performance. Investors buy shares of funds that track indexes, and fund managers purchase stocks to match the index's performance closely.

  • Index investing typically has lower fees than active investing due to its passive investment style and offers diversification by spreading risk across a broad range of stocks.

  • When evaluating index funds, remember that the performance isn’t measured on how well it performs, but rather how closely the returns align with the index the fund is designed to track.

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