Lucky you, if you’re in an index fund. The best-known market benchmarks, the Dow Jones industrial average and the S&P 500, have been soaring to record highs, taking index-fund investors along for the ride.
Investing is a straightforward process once you understand that index funds are a smart option for your portfolio.
Index funds are mutual funds or exchange-traded funds that track an index, such as the S&P 500. They are designed to give investors exposure to a broad swath of the stock market at a very low cost.
Index funds are distinct from actively managed funds. An active fund and an index fund may hold some of the same companies. But the active fund will hold them in different weightings and concentrations in an attempt to beat the index, which leads to a vastly different set of risks and returns.
Index funds consistently outperform most active funds, and they do it with lower fees.
What’s an index?
An index is a set of companies that represents some segment of the stock market or even the entire stock market. The Standard & Poor’s 500 — S&P 500 for short — tracks 500 large companies and is the nemesis of active managers who try to beat it.
The Wilshire 5000 is broader, and is designed to measure the performance of all stocks actively traded in the U.S. And then there’s the Russell 2000, which measures the ups and downs of small-cap companies.
There are indexes for every sector of the market throughout the world — hundreds of them.
“A good way to think about it is like a funnel. You could think about it in terms of the broadest of the broad markets, and then imagine it narrowing to focus on specific types of companies,” says Jim Rowley, head of active-passive portfolio research at Vanguard.
Investors can choose a single fund that tracks the world stock market or build their own template with index funds of individual countries or regions.
There are other ways to slice the pie that is the stock market. There are indexes that track companies according to size — large, medium or small — and indexes that follow one particular sector or industry, such as health care or technology.
Here’s another wrinkle: Bond indexes split up the bond market in similar ways. Rather than segmenting bonds by the size of the company, they are grouped according to the creditworthiness of the company, because bonds are a debt instrument. They’re also categorized by the bonds’ maturity. For instance, short-term bonds are in one basket, while long-term bonds are in another.
Wait, that sounds complicated
The myriad options can be overwhelming, but don’t give up.
“One of the great things about index funds is that they are a great starting point,” Vanguard’s Rowley says. Vanguard was founded by John Bogle, the inventor of the index fund.
“If you want to build a broadly diversified, low-cost portfolio, a smart way is to choose a U.S. market index fund, an international market fund and investment-grade bonds,” he says.
Consider this example: Vanguard’s Total Stock Market Index Fund includes about 3,600 stocks. Its Total International Stock Index Fund is made up of companies in emerging markets and developed countries, excluding the U.S. It consists of 6,270 stocks.
Two funds, nearly 10,000 stocks, plus one high-quality bond fund. And just like that, you’re investing like a pro.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|