So much attention is paid to finding the diamond in the rough stock that will turn into gold. But, according to investor Daniel Calugar, one of the most profitable ways to make money in the stock market is to invest in index funds.
Index funds have low fees and require next to no fuss. So, why don't more people invest in them?
It's possible that everyday consumers may not know what an index fund is or how easy they are to invest in. Here's a simple guide for investing in index funds.
What is an Index Fund?
Instead of tracking the performance of one specific company, an index fund will track the performance of an entire stock index. Most index funds will invest in every component that makes up the index, and the managers of those funds ensure they perform at the same level as the overall index.
When you invest index funds, you are essentially investing in the overall performance of all the companies in that index.
If you want to invest in large U.S.-based companies, you can choose an index fund based around the Nasdaq Composite, Dow Jones Industrial Average, or S&P 500. Small U.S.-based stocks can be found in the S&P SmallCap 600 or the Russell 2000.
There are also index funds that focus on international stocks and bonds and some dedicated to specific industries.
Choose the Index and Fund
The first step in investing in an index fund is choosing the index you want to track. If you're just starting, you may want to go with one of the more significant indices, the S&P 500.
That index comprises of large, recognizable companies such as 3M, Google's parent company Alphabet, Amazon, American Express, and Apple. The average annual return of the S&P 500 has been between 10% and 11% since its inception in 1926. This makes it a solid index to invest in.
After you pick the index, it's time to pick a fund. With an extensive index such as the S&P 500, you may have multiple choices of index funds. Some of the smaller indices won't offer as many index funds.
Look for funds that have the lowest costs, the performance that tracks the index's performance the most closely, and if there are any restrictions or limitations.
After you've settled on a specific fund, investing is simple. If you don't already have one, just open an account with a brokerage firm, and select the index fund you want to purchase.
Daniel Calugar points out that some companies that run index funds will even allow investors to purchase from them directly. This could be a viable option, as some brokerages charge extra fees for index funds.
The biggest tip for people who want to invest in an index fund is to be patient. Ignore the day-to-day ups and downs of the market.
Investing in an index fund is a long game. Again, remember that the S&P 500 has produced an annual average return of more than 10% for the nearly 100 years it's been in existence.
Investing in an index fund allows you to grow your money smartly while reducing your risk and minimizing how much time you spend creating and managing your investment portfolio.
About Daniel Calugar
Daniel Calugar is a versatile and experienced investor with a computer science, business, and law background. He developed a passion for investing while working as a pension lawyer and leveraged his technical capabilities to write computer programs that helped him identify more profitable investment strategies. When Dan Calugar is not working, he enjoys working out and being with friends and family, and volunteering with Angel Flight.