Get to know more about 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 in order 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 earnings.
index investing Diversification
By investing more broadly instead of picking individual stocks to bet on, index funds can give you more exposure and help spread your risk around.
 index investing efficiency
The strategy doesn’t require decisions about what stocks to invest in, and it doesn’t involve making frequent trades to change your position. Think of it as an autopilot.

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.

How does index investing work?

When you use index investing, you aren’t investing your money in an index itself, such as the S&P 500. Indexes themselves merely track the performance of a group of stocks. Instead, you’ll purchase shares of funds that aim to closely match the returns of these trackers.

Index fund managers will buy shares of every company listed on the index, or at least a representative sample, to accomplish that goal. In some cases, the index may be weighted by measures like share price or market capitalization (total value). In those cases, the fund manager will buy proportionate amounts of stock in line with the index, giving you larger exposure to certain companies.

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.