Indexes are always useful.
In the back of a book, they help you find the right pages you need to study. On your hand, your index finger is good for pointing and for jabbing at someone who's annoying you.
In investing, index funds can help you invest your money without being charged a ton of fees.
An index fund is a group of stocks and bonds, just like any mutual fund. But it's different because it's tied to a stock market index, like the Dow. The funds are usually linked to a specific market strategy or some basic logic or philosophy that looked good to investors. For example, a fund may be linked to tech stocks or ethical businesses or big businesses. If you think mods may be profitable over a long time, you could create a fund related to body art businesses.
To give you a general idea of the kinds of stocks you might invest in with an index fund, let's take a peek at some of the stocks in the Dow (which is made up of big cap industrial companies that are supposed to show off the industrial strength of the world and of the U.S.):
Why Index Funds?
Index funds make a decent investment for a few reasons:
(1) You get charged less in fees, commissions, and other taxes.
With most mutual funds, a fund manager is always working away, trying to earn their corner office. They're wheeling, dealing, schmoozing, and making paper airplanes in the office (hey, it gets boring in there sometimes). All that work means that fund managers feel they deserve a big commission. Since they're selling and buying stocks to make the fund work, they're getting charged taxes and those get passed on to you.
Index funds are more of a "keep it simple, stupid" idea. They get linked to a specific index and kind of do their thing. They're sometimes called a passive investment because they don't need all the intense maintenance. Since there's less maintenance, the fees are lower and there's less of those pesky taxes to pay, too.
(2) You're not trying to beat the market.
Have you ever tried to stay up really late in a study group with a bunch of slackers, hoping that the cramming session would get you an A? It's pretty pointless because you show up the next day for your exam having learned about nothing except Channing Tatum's abs—and you're far too tired to write a sentence.
Trying to beat the market is about as pointless. There's no way to predict which stocks will go up and down over the long term, and most fund managers (even the ones with really fancy suits) get it wrong most of the time.
With an index fund, you're not trying to beat the market. You're staying with the market—you know, the thing that goes up and up as long as you give it enough time? Staying with the market means you have at least a decent shot of earning money on your investment, as long as you don't take your money out too soon.
(3) You can invest and still actually have a life.
Trying to find the right stocks or mutual fund can be about as much fun as finals week. There are financial charts to look at, companies to research, and options to compare.
Index funds are about as simple as investing gets. You get a nice mix of stocks with relatively low fees, and you don't have to do a ton of research beyond figuring out which index you want your fund linked to. And if you're in a rush and feeling really lazy, choosing a fund linked to a major index like the Dow is a sure bet.
Do you really think Visa is going to lose money soon with the way you've been using your plastic?