How to Invest in Indexes

Most actively managed funds fail to beat the averages.

Although many stock market investors spend their time looking for stocks and mutual funds that will beat the market averages, others simply invest in stock index funds and exchange-traded funds that track stock market averages. This has proven to be a good strategy over the long haul. Ninety percent of actively managed mutual funds fail to beat the averages over the long term, says investment writer John Bogle. Investing in indexes makes a lot of sense for the average investor.

Things You'll Need

• Account application
• Investment funds

Instructions

1. Decide which approach to index investing suits you best. There are two ways to invest in stock market indexes--index mutual funds and exchange-traded funds, or ETFs. An ETF allows investors to buy and sell the index in real time during the trading day. Mutual funds are priced at the end of each day. One downside of ETF investing is that a commission is charged each time new shares are purchased. With an index mutual fund, investors can automatically reinvest their dividends and capital gains, or even set up an automatic monthly transfer from a checking or savings account.

2. Decide which index you want to invest in. There are a number of index funds and ETFs, each tracking a different segment of the market. You can purchase an ETF that tracks the entire U.S. stock market by investing in ticker symbol VTI. You can buy an ETF that tracks the performance of the Standard and Poors 500 by choosing ticker symbol SPY. There are also index mutual funds that track both indexes--these funds are offered by all the major mutual fund families, including TIAA-CREF, Vanguard and Charles Schwab.

3. Contact the mutual fund company or brokerage firm with which you want to invest . In many cases you will be able to open your account online and fund it instantly with a transfer from your bank account. In other cases you will need to complete a paper application and mail it with your initial investment. Be sure to include all the required information, including your name, Social Security number and mailing address.

4. List the index funds you wish to invest in when completing the mutual fund application. When opening a brokerage account, wait for your initial investment to be posted, then use the trading menu on the brokerage's website to purchase the desired number of shares in the ETF you choose.

References

• John Bogle: Investment Advice