{"id":198411,"date":"2015-08-25T04:00:37","date_gmt":"2015-08-25T11:00:37","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=198411"},"modified":"2019-12-12T16:46:23","modified_gmt":"2019-12-13T00:46:23","slug":"how-to-invest-in-index-funds","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/how-to-invest-in-index-funds\/","title":{"rendered":"How to invest in index funds"},"content":{"rendered":"
Despite the fact managed mutual funds still dominate the mutual fund landscape, there has been a steady migration of assets from managed funds to index funds and ETFs (most of which are indexed). In fact, there are more than 350 index funds from which to choose, so when you start to look into investing your money in an index fund, you’ll need to understand these two things:<\/p>\n Some people classify money market funds as index funds because they’re passively managed, but money market funds are not based on an index. Instead, three broad categories describe how index funds are generally broken down, as shown in this pie chart from ICI data: <\/a><\/p>\n The chart shows:<\/p>\n Into which type of fund should you place your investment? To help you decide, here are a few important things to consider.<\/p>\n If you want to get started with something simple, you won’t go wrong by picking the largest index fund of all, the Vanguard 500 Index Fund, the one that started it all (Symbol: VFIAX<\/strong>). There has also been a large fund covering the entire stock market — not just the 500 biggest companies — as well as other index funds which slice and dice the stock market to any flavor you might want.<\/p>\n Most people understand what stocks and the stock market are because those make headlines daily. The bond market, on the other hand, is less known, even though the bond market is roughly twice the size<\/strong> of the stock market worldwide. Part of the reason for its obscurity is it’s not nearly as easy for individuals to buy bonds as it is to buy stocks, and, compared to stocks, they’re … shall we say … boring. Many people don’t even know what a bond is.<\/p>\n A bond a piece of paper documenting a debt. Earlier this year, for example, Microsoft sold bonds. Each bond cost $1,000 and pays interest quarterly, in cash, calculated at 2.724 percent per year, until 2025, at which time they will pay back the $1,000 to whoever owns the piece of paper (or bond).<\/p>\n There are thousands of bonds, each with a different maturity date and interest rate, and these trade daily on exchanges worldwide. You can see their prices on the same newspaper pages showing stock prices. Deciphering those quotes might be a little trickier, but bonds are as numerous and as frequently traded.<\/p>\n
\nThis is the third installment of a three-part series examining index funds. In Part I<\/a>, we looked at the managed mutual fund market. In Part II<\/a>, we looked at how an index is calculated and what an index fund is. In this installment, we’ll consider how to evaluate index funds and where to buy them.<\/em><\/p>\n\n
<\/span>Types of Index Funds<\/span><\/h2>\n
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<\/span>How to Decide on an Index Fund<\/span><\/h2>\n
Stock Funds<\/strong><\/h3>\n
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Bond Funds<\/strong><\/h3>\n
<\/span>What is a Bond?<\/span><\/h2>\n
A few characteristics distinguish bonds:<\/h3>\n
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