Ask the Piggy Bank: What is An Index Fund?

Today I am pleased to answer a reader question about investing. Here it is:

I’ve heard a lot lately about the advisability of investing in index funds. What is an index fund?

If you’ve been reading advice about investing lately, you might have the same question. After all, many financial planning experts and investing analysts recommend index funds for long-term investing, as well as a good choice when it comes to riding out a down stock market.

An index fund is a mutual fund that follows a specific index. The S&P 500 Index is one of the more popular for this purpose. You basically invest in every company listed on an index. Other stock indexes that have funds include DJ Wilshire 5000 (the whole stock market), Russell 2000 (which consists of small companies) and the MSCI EAFE (European and Asian stocks).

These are considered low-maintenance  ways to invest. Index funds usually perform well, and often beat managed funds. Look for a low-cost index fund. Realize that while the returns won’t be anything really sexy, they will usually provide stable, reasonable returns that beat inflation.

If you want to ask a question, email the Piggy Bank.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional.