Index Funds: Own a Little of Everything

The story: Marcus and the hot tip

Marcus watches a stock-tip video on a phone, then Ana uses a store shelf to explain owning the whole market.

1. Narrator: Marcus wants to start investing. A video says the trick is finding the next big winner.
2. Marcus: How would I even know which company will win?
3. Ana: Most people can’t. Over long periods, most professional stock pickers have trailed the market.
4. Narrator: An index is a list that tracks a market, like the biggest US companies. An index fund simply buys everything on the list.
5. Narrator: No picking means low costs. Many index funds charge a tiny yearly fee.
6. Marcus: So instead of hunting for one needle, I own the whole haystack.
7. Narrator: Owning the haystack beats hunting for the needle, for most long-term investors.

What you’ll learn

1. What an index is

   An index is a list that tracks part of a market, like the biggest US companies or the whole US bond market. Its value works like a scoreboard for how that part of the market is doing.

2. Passive vs active

   An active fund pays managers to pick investments they hope will win. A passive fund, or index fund, just buys what’s on its index. Over long periods, most active funds have trailed their index after fees (see the card).

3. Low fees matter

   Every fund charges a yearly fee called the expense ratio, shown as a percent of your money. Index funds are often among the cheapest. A smaller fee leaves more of the growth in your account, every single year.

   Example: on $10,000, a 0.05% fee is $5 a year and a 1% fee is $100 a year.

4. Broad, narrow and all-in-one

   A broad index fund holds thousands of companies. A narrow one holds a single industry, which swings more. A target-date fund is an all-in-one mix of stocks and bonds that shifts toward bonds as its target year gets closer.

Key words

index

a list that tracks part of a market

index fund

a fund that buys everything on an index

Also called: passive fund

target-date fund

an all-in-one mix that gets more careful as its year nears

expense ratio

the yearly fee a fund charges, as a percent of your money

Common questions

Can an index fund lose money?

Yes. When the whole market falls, an index fund falls with it. Owning everything spreads out single-company risk, not market risk.

Where do I find a fund’s expense ratio?

On the fund’s fact sheet or in a retirement plan’s fund list, usually near the top.

Remember this

Owning the haystack beats hunting for the needle.

Try it: Check one fund’s fee

1. Open a retirement plan’s fund menu, or any fund’s public fact sheet (outside the app).
2. Look for an index fund or a target-date fund.
3. Write down its expense ratio.

The whole mission; no account or app needed.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

• How active funds compare with their index (SPIVA)

  Source: S&P Dow Jones Indices(opens in a new tab)

• Index funds explained

  Source: Investor.gov (SEC)(opens in a new tab)