Investing can seem intimidating: What if you make a bad choice and lose money? or what about a lack of access to quality investing advice? At the end of the day, however, that fear can be holding you back from really growing your net worth.
The good news is there are many easy ways to invest; you don't have to worry about picking individual stocks, and hiring an expensive advisor isn't always necessary.
One of the easiest ways to get started investing is through index funds.
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How index funds work
Index funds are investment funds that follow a benchmark index, such as the S&P 500 or the Nasdaq 100.
When you put money into an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks.
Let's use the S&P 500 as an example. The S&P 500 is one of the major indexes that tracks the performance of the 500 largest companies in the U.S. Investing in an S&P 500 fund (one of the most popular) means your investments are tied to the performance of a wide range of companies.
Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus hold a lower risk than individual stock holdings. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, it has historically generated nearly a 10% average annual return over time for investors. (Just remember that future returns are not guaranteed.)
Index investing is a form of passive investing
Index investors don't need to actively manage their investments as closely since the fund is just copying a particular index. This is why index funds are known as passive investing — and it's what sets them apart from actively managed mutual funds.
Actively manage mutual funds are operated by fund managers who choose your investments. The goal with these funds is to beat the market, while the goal with index funds is simply to match the market's performance. Since index funds don't require daily human management, they have lower management costs (called "expense ratios") than mutual funds. The money saved in fees by investing in an index fund over a mutual fund can save you lots of money in the long term and in turn help you make more money.
A common strategy for many investors who have a long investment timeline is to regularly invest money into an S&P 500 index fund (known as dollar-cost averaging) and watch their money grow over time.
Get started index investing with a brokerage account
Some of the top index funds are those that track the S&P 500 and have low costs. For example, Charles Schwab offers a S&P 500 index fund as a straightforward option with no investment minimum. Its expense ratio is 0.02%, meaning every $10,000 invested costs $2 annually. Passive, or index funds, generally have a 0.12% expense ratio, so this is notably low.
Charles Schwab
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Bonus
None
Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™, Schwab Organization Account and Schwab Trading Powered by Ameritrade™
Investment options
Stocks, bonds, mutual funds, CDs and ETFs
Educational resources
Extensive retirement planning tools
Terms apply.
For an option with no expense ratio whatsoever, consider Fidelity's fund that tracks large capitalization stocks.
Fidelity Investments
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen
Fees
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
Bonus
Find special offers here
Investment vehicles
Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
Investment options
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
Educational resources
Extensive tools and industry-leading, in-depth research from 20-plus independent providers
Terms apply.
To invest in an index fund, you'll need to open a brokerage account, a traditional IRA or a Roth IRA. (You can often choose to invest in index funds through your employer's 401(k), too.) Once your account is open and funded, you can choose from a number of different index funds, like a S&P 500 fund, a fund that tracks government bonds or a fund that tracks international stocks.
Beginners especially can consider also using a robo-advisor like Betterment or Wealthfront (both of which CNBC Select rated highly on our list of the best robo-advisors), which will invest in a handful of index funds and ETFs based on your risk tolerance and investment timeline. Robo-advisors will automatically rebalance your portfolio based on market conditions and have much lower fees than traditional financial advisors.
Betterment
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Wealthfront
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Bonus
None
Investment vehicles
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Educational resources
Offers free financial planning for college planning, retirement and homebuying
Terms apply.
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FAQs
Are index funds good for beginners?
Index funds can be a good investing vehicle for beginners because they generally offer low risk, low cost and you don't need to know much about investing to get started.
Is the S&P 500 an index fund?
The S&P 500 is an index that measures the performance of roughly 500 large, publicly traded U.S. companies. You can't invest directly in the S&P 500 but you can invest in funds that try to mirror its performance.
Do index funds make money?
Yes, index funds can generate a return; however, like with every investment, there's risk involved when putting your cash in the market.
How do I put money in an index fund?
You put money in an index fund by opening and funding a brokerage account. Then, you can choose which funds you want to invest in.
Do index funds pay you?
Yes, many index funds pay investors through dividends, either quarterly or annually.
How much do you need to invest in index funds?
Some brokerage firms have no minimum investment requirements, while others vary from $1 to several thousand dollars.
Is it smart to put all your money in an index fund?
Putting all your money in an index fund is a risky move since the market involves risk. Before investing, make sure you have an emergency fund in place and any high-interest rate debt paid off.
What is a good index fund for beginners?
A good index fund for beginners tracks the S&P 500, since it historically offers a good annual rate of return at a low cost.
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