- Business Insider asked financial planners how to start investing and nearly everyone said index funds.
- Legendary investor Warren Buffett is a big fan of the index fund, once calling it “the most sensible equity investment.”
- Index funds are a type of passive investment that exposes investors to a broad selection of stocks in order to diversify and ultimately minimize risk. They’re low-cost and regularly outperform actively managed funds.
- Index funds are a good option for people looking for a “set and forget” investment.
Getting started investing can be scary.
All investments bear some level of risk, but according to financial planners, you can’t go wrong with index funds.
“For someone that is just beginning, I recommend using index funds,” Luis Rosa, a CFP who founded the financial-planning firm Build a Better Financial Future, told Business Insider. “They’re cost-effective and you can be in the market without being an expert.”
“I always am going to side with a portfolio of low-cost index funds, whether you’re investing your first dollar or you have 40 years of investment management experience,” said Andrew Westlin, a CFP at Betterment.
Bobbi Rebell, a CFP and host of the “Financial Grownup” podcast, said index funds “provide the best diversification at the lowest cost.”
Even Warren Buffett is known to sing its praises, calling the index fund “the most sensible equity investment.” The legendary investor advised shareholders of his company, Berkshire Hathaway, in 2014 to invest 90% of their cash in a “very low cost” index fund.
When John, self-made millionaire and early retiree who runs personal-finance blog ESI Money, interviewed 100 millionaires he found they, like him, overwhelmingly favored index funds. “The high returns and low costs of stock index funds (I personally prefer Vanguard as do many millionaires) are the foundation that many a millionaire’s wealth is built upon,” he wrote in a blog post.
Vanguard founder Jack Bogle created the very first index fund in 1976 to “put the shareholder in the driver’s seat (rather than reposing in the back seat, with the management company driving the car for a fee).”
Index funds are investments in a broad selection of stocks. Rather than choosing and buying individual stocks, an investor owns a small piece of every company or asset in the fund. An S&P 500 index fund, for example, tracks the 500 largest US companies, including Google, Microsoft, ExxonMobil, and General Electric. One of the biggest index funds, Vanguard’s Total Stock Market Index Fund, tracks a much larger selection of stocks from large, mid-sized, and small companies.
“You can also buy different types of funds based on your goals,” Rosa said. “For example, if it’s a retirement goal, you can buy a target date fund which invests more aggressively at the beginning and it gets more conservative as you get closer to retirement age. It automatically rebalances so you don’t need to be an expert at buying and selling.”
Index funds are particularly attractive for their low fees. These funds are not actively managed — you’re not paying someone to buy and sell your shares in order to beat the market. Instead, each fund is designed to match the market, so total operating costs — otherwise known as an expense ratio — should be low. The typical expense ratio for a passive index fund is about 0.2%, according to Investopedia.
Plus, in spite of low costs, index funds regularly outperform actively managed funds. They’re the ultimate “set and forget” investment.
As Bogle wrote in his book “The Little Book of Common Sense Investing,” “It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose.”