Investing 101

What is index investing?

Index investing involves investing in assets associated with a market index with a goal of mirroring its performance, offering benefits like lower costs, diversification and efficiency. However, it does not consider market fluctuations or aim to outperform the market. Fund managers purchase stocks seeking to match the index's performance closely. Index investing typically has lower fees than investing due to its efficiency, offers diversification by spreading risk across a broad range of stocks, passive investment style, and offers.

Key takeaways

  • 01

    Know the potential benefits

    Index investing usually has lower fees, can give you more exposure and help spread your risk around, and doesn’t involve making frequent trades to change your position.

  • 02

    Understand how it’s different

    Your savings won’t be adjusted by a manager toward different investment allocations when there are market fluctuations and it won’t seek extra returns like active strategies that could boost your savings further.

  • 03

    Learn how it works

    You aren’t investing your money in an index itself, such as the S&P 500, but rather tracking the performance of a group of stocks. Index fund managers will buy shares of every company listed on the index, or at least a representative sample, to help accomplish that goal.

Index investing for retirement

What is index investing?

When you save for retirement, you also have to decide how to invest your savings. One option for long-term investing is index investing, which involves investing in the assets associated with an index seeking to mirror its performance. These indexes are typically groups of stocks or bonds, with some of the more familiar ones being the S&P 500 and the Dow Jones Industrial Average.

The goal of the strategy is to replicate a market and capture the returns of an index as closely as possible. It is also a way to invest with relatively low fees so that more of the returns are yours to keep. A different approach is taken with active investing where managers seek to earn higher returns compared to the index.

Potential benefits of index investing

Low cost index investing
Lower cost
Since index investing is efficient and doesn’t require extra research, it usually has lower fees. Over the long run, that means you may be able to keep more of your money.
index investing Diversification
Diversification
By investing more broadly instead of picking individual stocks to bet on, index funds can give you more exposure and help spread your risk around.
index investing efficiency
Efficiency
The strategy doesn’t require decisions about what stocks to invest in, and it doesn’t involve making frequent trades to change your position. Think of it as an autopilot.

Potential considerations with index investing

Read more about Market factors not considered
Market factors not considered
When there are fluctuations in the market, your savings won’t be adjusted by a manager towards different investments in order to avoid loss or seek gains.
Read more about Doesn’t seek to outperform
Doesn’t seek to outperform
Index investing aims to capture the average returns of the market. Unlike active strategies, it won’t seek extra returns that could boost your savings further.
Wrap up

Frequently asked questions

  • Index investing involves investing in assets associated with a market index, like the S&P 500, seeking to mirror its performance. Investors buy shares of funds that track indexes, and fund managers purchase stocks to match the index's performance closely.

  • Index investing typically has lower fees than active investing due to its passive investment style and offers diversification by spreading risk across a broad range of stocks.

  • When evaluating index funds, remember that the performance isn’t measured on how well it performs, but rather how closely the returns align with the index the fund is designed to track.

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