What's an Index? An index is used to generally measure how well stocks are performing. For example, the S&P 500 takes the largest 500 companies by market capitalization and tracks their weighted performance. It's often used to measure how well the entire market is doing in general.
What's a Fund? A fund is a pool of money collected from many investors to invest in stocks, bonds, and other assets. The fund manager is in charge of picking which stocks belong to the fund. In return, you pay the manager a fee. Instead of investing in a single company, an investor could invest in a fund to diversify among many.
Over the long term, most of these funds perform worse than then the S&P 500 — especially when coupled with their high fees. An index fund is a fund that simply follows an index. For example, VFINX or VTI just follows the S&P 500 index. Index funds are beneficial because:
- fees are very low
- they're generally low risk (because they're heavily diversified)
- they're ideal for passive, buy-and-hold, very long term investments
When you put money in your taxable account, Roth IRA, 401k, and HSA — be sure to invest it in low cost index funds. It's usually better than higher cost mutual funds or risky individual stocks.
A Lazy Portfolio is an investment portfolio made up of a small number of low-cost index funds. They're meant for passive investing — investors can be "lazy" and simply keep the same portfolio over long periods of time, occasionally rebalancing.
For example, a simple three fund portfolio that's very diversified:
- VBTLX: Total Bond Market Index Fund
- VTSAX: Total Stock Market Index Fund (US Companies Only)
- VTIAX: Total International Stock Index Fund (Non-US Companies)
A simple four fund portfolio suggests adding Real Estate via the VGSLX fund. Other portfolios go further and suggest value tilting — giving more weight to smaller companies or emerging markets.
Learn more from Bogleheads:
JL Collins' The Simple Path to Wealth is an excellent book on investing.
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Max Out Your 401k Take advantage of employer match and tax savings
Max Out Your Roth IRA Save additional money in an IRA (via a backdoor)
Max Out Your HSA Invest money in a pre-tax (and post-tax!) free account
Use a Taxable Investment Account Don't lose your money to inflation
Automate Investments Setup a system to pay yourself first