Get to know more about 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 in order 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.

How does index investing work?

When you use index investing, you aren’t investing your money in an index itself, such as the S&P 500. Indexes themselves merely track the performance of a group of stocks. Instead, you’ll purchase shares of funds that aim to closely match the returns of these trackers.

Index fund managers will buy shares of every company listed on the index, or at least a representative sample, to accomplish that goal. In some cases, the index may be weighted by measures like share price or market capitalization (total value). In those cases, the fund manager will buy proportionate amounts of stock in line with the index, giving you larger exposure to certain companies.

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.