Starting to invest with index funds

Index Funds: A Good Place to Start Investing


by

19 March,2013

One of the questions I am most often asked is where someone should start when it comes to investing.

For many would-be investors, the whole situation seems daunting. How do you get started? And how do you know which investments to pick?

The good news is that getting started is relatively simple; for the most part all you need is $25 and access to a computer. And if you aren’t sure about where to start with your investments, index funds are a good place to begin.

What are Index Funds?

Index funds basically track a particular index. You can find them in mutual fund format, or you can invest in them as exchange traded funds (ETFs).

An index fund might follow an all-market index, giving you some exposure to the entire range of listed companies, or it might follow a smaller index. You can find index funds that follow the Russell 2000, or you can diversify your holdings with a fund that follow a foreign index.

To start, though, many investors are likely to find that an all-market fund is a simple way to get started. Your success follows the overall success of the stock market. (Over time, this can be a good thing, since, historically, the stock market has let to lose over a period of 25 years.)

It’s also possible to use index funds to invest in bonds. There are bond index funds that can help you build a portfolio according to the principles of modern portfolio theory, using stocks and bonds in your make-up. It can be a good way to add a little diversity without too much trouble and expense.

You can invest in index funds with most online brokers, and you can use dollar cost averaging with them, so it makes it easy to start and invest a little at a time, if you don’t have a lot of resources to devote to investing right now. You can increase your investment as your finances improve.

Moving Beyond All-Market Funds

While an all-market fund can be a good place to start, you can move on. Use your index fund as a way to get started on something with acceptable risk so that your money begins growing. But, while your money grows, consider other options.

Educate yourself about other investment products. Learn about financial ratios and value investing, and how to pick a solid stock, including the possibility of investing in dividend stocks. You can also learn about other types of investments, including options and futures, and decide whether they are appropriate for your investment situation. You can even look into ETFs that are based on commodities and currencies.

However, before you start getting too exotic in your investments, it makes sense to know what you are getting into. You should understand the investments you make, rather than investing without a good working knowledge of how different financial instruments and products work. Starting with index funds gives you a chance to use something easy to understand, and just get started, while you research other options and determine what works best for you.