#1 Finance Tip You Always Hear: Invest your extra cash in an Index Fund?!

Ok – but what the heck is an index fund?

A lot of what makes finance unapproachable for some is the jargon.?So let me break it down for you, an “index fund” is simply a diversified basket of stocks.

Ok – but what is diversification?

Diversification ensures you don’t have “all your eggs in one basket”.?In the case of stocks that means owning stocks for different types of companies: Technology, Consumer Goods, Transportation, Oil, etc…?By investing in a diversified set of stocks you can help reduce your risk.?If all your money is in technology stocks, and the technology market goes down -15%, your entire portfolio will go down 15%! But if only say 5% of your stocks are in technology, then when those stocks go down 15%, your portfolio will only go down <1%. ?And it’s likely that other stocks in your “basket” will go up.

Back to index funds?

Rather than having to go and buy 15 different stocks from different industries and then constantly have to rebalance your portfolio you can simply buy 1 share in an index fund – which contains many stocks already.?There’s different types of indexes but the most common ones you’ll hear are “S&P 500”, “Nasdaq”, and “Dow Jones Industrial Average”.?

The S&P 500, as the name implies, is an index which tracks the performance of 500 large, leading publicly traded companies.?This is the best index to use for broad market diversification.?

So how do you buy an Index Fund?

You can purchase shares of “exchange traded funds (ETFs)” or purchase mutual funds which hold the exact same portfolio.?Stand by for more details on this later this week!