This episode of the Finance Flash Go podcast is one of my favorite topics, index funds!
An index fund is a collection of stocks strategically picked to mirror some index marker of the overall stock market. For instance, the S&P 500 is an index with a collection of stocks thought to give a good sense of the overall market. (Is the market going up or down?, etc.).
An index fund will mirror the movement of the index that it is based on. Betting on the whole stock market is a much safer bet. Over the long term, the overall stock market has always gone up. If you put money in the overall stock market at any point in history and just did nothing and kept it there for 20 years, you would have made a lot of money. This is largely what you are doing by investing in broadly diversified index funds. For example, the brokerage Vanguard (my favorite for its low costs and ease of use) has an index fund of every stock in the entire U.S. stock market. Buy that index fund and you own the next Enron, but you also own the next Apple. And everything in between. You will be investing in the innovation and entrepreneurial spirit of humankind.
Now, you may want to also bet on the global economy in addition to the U.S. economy. So you can buy a broadly diversified international stock index fund.
Hmmm…still feeling like you’re taking on too much risk by putting all of your savings into stocks, even though you’re not planning to need it for 15-20 years. No problem. You can buy a bond index fund just the same way as a stock index fund. The performance of bonds does not correlate with the performance of stocks, so you are now diversifying.
Lastly, you’ve heard that real estate is a smart investment but aren’t ready to buy a rental property. We still have you covered. You buy a REIT (Real Estate Investment Trust) index fund. This is essentially a fund representing ownership in a collection of real estate investments. REITs behave differently than stocks AND bonds, so you are even more diversified.
Over the long term, you know that your investments will rise because you are smart and bet on the ingenuity of humankind rather than try to stock pick or time the market, which no one in history has been able to do reliably.
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