In picking an index fund chose one that has low fees and includes a large variety of different stocks. One very good index is the Standard & Poor’s 500 Index which includes stock from the 500 largest U.S. companies. These companies represent 70% of the value of all U.S. stock.
Another and even more diversified fund is a “total stock market” index fund. This is virtually the entire stock market of about 5,000 companies.
A third option is an index fund that includes non-U.S. companies, providing even more diversity.
Index funds are essentially the same so the key criteria in choosing one is the overhead costs. You can get your index fund through your retirement plan or as a stand-alone investment. If stand-alone, look for one with the smallest fees associated with it. Go online and hunt for a discount brokerage with the lowest fees. If you get your retirement plan through your work you must choose from the list of options our employers provides. If one is available, go with the index fund. If none, go for the lowest cost, most-diversified mutual fund. Also ask your boss to add a mutual fund.
Recognize that these are long term investments. You do not go chasing the stock market which is going to go up and down like a roller coaster. You do not sell when the market drops or cash in when it goes up. Just remain calm and go about your other business. This is money for years later. Balance and growth will be restored over time.
By using an index fund you will make a lot more money than just keeping the cash n the bank over decades. In fact, keeping it in the bank and not using an index fund amounts to a loss of natural investment growth. Banks do not pay much and you are looking at 10% of more growth over a decade of index fund investment.
*Post theory is primarily derived from the book All Your Worth by Elizabeth Warren & Amelia Tyagi which is highly recommended reading.
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Southeast Iowa