What is an Index Fund?

An index fund is a financial instrument that provides exceptional diversity at low cost. It is traded like a stock, except when you buy a stock you purchase shares in one company. When you buy an index fund, you buy all the companies in the index it tracks, all at once, in one simple transaction and your financial returns replicate closely those of the market the index tracks.

Click here to learn more about index fund construction.


History of Index Funds

Index funds were invented by John Bogle, who wrote his senior thesis at Princeton in 1951 on them. Later Bogle started Vanguard, now one of the largest asset managers in the world, with indexing as its core philosophy.

Originally index funds were dubbed "Bogle's Folly" because the financial industry assumed the premise was absurd: that investors tracking an index could do better than those with professional, expensive mutual fund managers.

The financial industry turned out to be wrong. Decades of data now show that Bogle was correct, and by a long shot (1). In those decades, as data piled up in its favor, the idea of index investing moved from a fringe concept to the mainstream. Today more money is being invested in index funds than in active mutual funds.

"Beethoven could tell you how to write a symphony but you can't write a symphony like Beethoven does. You can't copy, with any hope of success, a Beethoven or a Warren Buffett. You can copy Bogle at any moment of time. Just buy index funds."

- John Bogle

Active vs Passive Investing

Unlike most mutual funds, an index fund does not have a fund manager making active decisions about what to buy and sell each day. The job of the people running the index fund is to closely track it's underlying "basket" of securities - that is all. For example, all of the large companies in America. Or all of the publicly traded real estate investment trusts. Because of this, it is called a "passive" investment. Most mutual funds are considered "active" investments because fund managers are deciding what securities to buy and sell.

Index Funds Charge Much Less

Despite the fact that they generally outperform actively managed funds, index funds often charge one-tenth to one-thirtieth the fees of active funds!

"You get what you don't pay for."

- John Bogle, on protecting your savings from fees

Thousands of Index Funds Exist

Unlike Bogle's original fund, index funds don't just track the S&P 500 anymore. There are thousands of index funds, and they track every imaginable sector and country around the world. We will help you differentiate between the various index funds and simplify this universe to a handful of the most appropriate, diverse, and low-cost funds.

How this affects you

Index funds could be one of the most significant inventions of the 20th century for you. Simply buy entire markets at once, minimize your fees in doing so, and compound your results year in and year out. A conservative analysis shows that over a lifetime of work and saving you will transfer 66% of your money to the financial industry if you pay its standard high fees. Index funds free you from this.

Speaking of low fees, let's look into that more...



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DIFFERENTIATORS
GETTING STARTED
MATERIALS
How Are We Different
Understanding Your Financial Statement
Articles on Investing
Investing with Low Cost Index Funds
Pay Yourself First
About the SECURE Act
Why Use a Fiduciary Financial Advisor?
Financial Planning
Quarterly Booklets
Simple, Low Investment Fees
Investor Resources
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Financial Firm Comparison
The Investment Process
One Day In July in the Media
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How to Switch Financial Advisors
Frequently Asked Questions
Types of Investors
SERVICES
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Environmental Investing: How it Differs from ESG
Vermont Financial Advisors
How to Invest for College Savings
INVESTING THOUGHTS
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
Inflation
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Aim for Average
How Finacial Firms Bill
Low Investment Fees
Understanding Fixed Income: Interest Rate Risk
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Articles by Dan Cunningham
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics

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