When it comes to building wealth, low-cost index funds are a great option for beginning investors. But how do you know which one is right for you?
Low Cost Index Funds For Beginning Investors: What Are Index Funds?
An index fund is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index. Index funds offer beginners a path to long-term financial growth through broad diversification and passive management. They generally use a passive investing strategy, which may save costs.
It's a simple concept, but it has proven to be a successful investment strategy, outperforming most active managers across markets and asset styles.
Why Choose Low-Cost Index Funds?
The cost of an expense ratio is taken out of the fund's returns before they're passed on to investors. This means that higher expense ratios can eat into your investment returns over time. For example - in 2007, retail S&P 500 index fund investors paid $206 million more in expenses (not including sales loads) than they would have if their entire S&P 500 index fund balance were in the retail no-load S&P 500 index fund with the lowest expense ratio.
The average index fund expense ratio is lower than the average actively managed fund, a difference that compounds significantly over decades. By choosing low-cost index funds, you can potentially earn more money over the long term without having to spend extra on high fees.
How to Choose Low-Cost Index Funds
There are several ways to choose low-cost index funds:
- Vanguard: Vanguard is known for its low-cost index funds. You can open an account with Vanguard and invest in its low-cost index funds. Vanguard's index funds have some of the lowest expense ratios in the industry, making them a great choice for beginning investors.
- Other Brokers: Other brokers and E*TRADE - also offer a small selection of free index funds. However, it's important to compare the expense ratios of these funds to ensure you're getting the best deal.
- Exchange-Traded Funds (ETFs): ETFs can also achieve the same result and often have lower investment minimums. However, it's important to note that not all ETFs are friendly when it comes to fees. Some ETFs can have expense ratios exceeding 10%, while others have expense ratios less than 0.10%.
How to Invest in Low-Cost Index Funds
To invest in low-cost index funds, you'll need to open an account with a brokerage firm or mutual fund company. Here are the steps you can follow:
- Choose a Brokerage Firm: There are many brokerage firms to choose from - Fidelity, and E*TRADE. Research each firm and choose the one that offers the best combination of low-cost index funds and customer service.
- Open an Account: Once you've chosen a brokerage firm, you'll need to open an account. This typically involves filling out an application and providing some personal information, such as your name, address - and social security number.
- Select Your Investments: Once your account is open, you can select the low-cost index funds you want to invest in. Be sure to compare the expense ratios of the funds to ensure you're getting the best deal.
- Set Up Automatic Contributions: To make investing easier, consider setting up automatic contributions to your account. This can help you build your investment portfolio over time without having to think about it.
Conclusion
By choosing low-cost index funds, you can potentially earn more money over time without having to spend extra on high fees. To invest in low-cost index funds, you'll need to open an account with a brokerage firm or mutual fund company and select the funds that offer the best combination of low costs and strong performance.
Remember to compare the expense ratios of the funds you're considering and set up automatic contributions to make investing easier. With a little research and planning - you can start building your investment portfolio today.
Disclaimer
This article is for general information only and isn't financial advice. Consider speaking with a licensed advisor about your own situation before making decisions.
