Index funds have, arguably, been touted as the best investment for the average investor. They have consistently outperformed the majority of the actively managed mutual funds. Over the long term broad stock market index funds have averaged an annual return of about 8%. Unfortunately many investors have taken these points to assume an index fund is a safer investment. Which is far from the truth.
You’ve most likely come across index funds as an option in a retirement plan, at a fund company’s website or seen them offered through your online broker. Almost every fund family offers several different index funds. But not all index funds are equal.
What Is An Index?
An index is a group of stocks used to represent a portion of the stock market. If you’ve heard of the Dow, Nasdaq, S&P 500, Russel 2000, or Wilshire 5000 you’ve heard of an index. Which are all used to measure a portion of the markets performance.
The most well known index, the Dow is an index of 30 large companies that are believed to mimic the overall market. The S&P 500, however, is an index of 500 companies that offers a representation of the overall markets performance. Continue Reading…