Too chicken to buy Apple stock? Can’t come up with $3,100 for one share of Amazon? Eyeing other highfliers like Facebook or Netflix, too? Well, there’s an easy, cheaper, and less-risky way to buy all these leading stocks in a single investment.
It’s called an index fund.
They aren’t sexy. They’re not run by fund managers you see on TV talking about the stocks they think will double – or ones they think will crumble. Index funds are diversified mutual funds whose holdings mirror a broad stock index, such as the S&P 500. They are the antithesis of putting all your eggs in one basket.
Instead of buying individual stocks on your own, you can buy a large basket of stocks all at once, such as all 500 large-company stocks in the S&P 500. If you’re performance-chasing, however, the best you can do with an index fund is match the returns of “the market” (minus a small fee) or the index the fund tracks. And while that means you can’t brag to friends that you “beat” the market, your returns won’t be worse than the market, either.
Index funds are considered a “passive” way to invest, versus buying so-called actively managed funds run by a stock-picking portfolio manager whose goal is to post bigger returns than the market benchmark against which he or she is measured.