What is an index fund and how do they work to make money? For the majority of us Index funds are a great way to build wealth for retirement. Most of us do not have the time and resources to manage our own portfolio. To have it produce enough income needed for retirement.
Index funds allow the average person to rest easy. Knowing that the investment can be more stable and profitable than most others. With that being said lets get into what exactly an Index fund is. So we can understand why this type of investment is loved by most investors.
What is an Index Fund
So what exactly is an Index fund? An index fund is an investment that mimics the overall performance of a specific market. Such as the S & P 500. The idea is that instead of gambling with a few companies held by the S & P 500. You are buying into the entire market which will increase your chances for success.
The two types of index funds are Mutual funds and Exchange traded funds. Index Funds are great for passive investors that like to buy and hold for long periods of time. The other perk is that they offer a lower cost because they do not require to be actively managed. Like other portfolios that are consistently swapping out companies that are under performing their expectations.
This lower expense ratio amounts to a significant amount of extra money left for the investor over the long run. The cons to index funds would be their vulnerability to market swings. Which happen because the investor is buying the market as a whole rather than individual companies within the market.
With that being said. It is vital to pay attention to the track record of the fund that you are putting your money into. Whether it is a mutual fund and/or an exchange traded fund. Next I would like to go over how to make money with an index fund.
Making Money With an Index Fund
The money making aspect can be extremely rewarding over the long term for a passive investor with patience. The short term on the other hand will produce little return. For the investor that wants to get in and out as soon as possible.
A perk to Exchange traded funds is that most if not all will have a quarterly dividend yield. This is great because as you build your investment in the index fund and it maintains good performance. Your amount paid as dividends will grow. Which in turn allows the investor to reinvest the earning on top of their regular contributions to the fund.
The key focus is to keep your attention on the long term. When it comes to these types of funds and understanding that they will not rapidly grow over night. The best way to make money with these kinds of funds is to accept that the returns at the beginning. Will not be as large as you might like. But have the potential to compound to rewarding levels with time and patience!