Index Funds 101

Why broad index funds win most of the time, what “total market” means, and how to actually buy one.

What is an index and an index fund?

An index is just a rule-based list of securities. An index fund is a vehicle that tries to match that list and its performance.

Example index: the S&P 500 tracks roughly 500 large US companies.
Index fund / ETF: owns the stocks in that index, weighted the same way, and charges a small fee to keep it in sync.
Goal: match the index, not beat it. You get the “market return” minus a tiny fee.

Over long periods, most active managers underperform simple low-cost index funds in the same category.

Costs: every extra percent in fees is one percent less that compounds for you.
Difficulty: beating the market after fees and taxes is genuinely hard, even for professionals.
Behavior: index investors who stay put often beat stock-pickers who jump around chasing recent winners.
Math: before costs, investors as a group earn the market return. After costs, the average investor must earn less.

The tickers differ across brokers, but the checklist is simple.

Index tracked: look for broad benchmarks like “Total US Stock Market” or “S&P 500”, not narrow sector or theme funds.
Expense ratio: for core stock funds, aim for a very low fee (often <0.10% in US markets).
Fund type: either mutual fund or ETF can work. Pick what your broker supports with low friction.
Minimums: some mutual funds have dollar minimums; ETFs are usually “one share at a time” and often support fractionals.

You don’t need dozens of funds. Most beginners can cover a lot with 2–4 building blocks.

All-in stock index: 100% broad stock index fund (highest growth and volatility).
Balanced 60/40: 60% stock index + 40% bond index for smoother rides.
Global tilt: 60% US stock index + 20% international stock index + 20% bond index.
Automated option: some brokers build these mixes for you inside robo-advisors or “pies”.

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