Index Fund Investing Explained

Index Fund investing sounds waaaay more complicated than it actually is.

When I first decided to open my Hargreaves Lansdown Stocks and Shares ISA I honestly had no idea what I was going to invest in.

I had watched some personal finance videos on YouTube. As a result, I came to the conclusion that pretty much everyone wealthy grew their money through investments.

But what sort of investments should I choose?

Suddenly I had this account that would let me own chunks of huge, household name businesses.

I opened a new tab and went back to YouTube!

After a fair few hours of watching, my mind was made up. My first investment would be into 2 specific Index Funds.

I believe Index Funds are the one of best place for beginners to start and the go-to for minimalist investors.

Index Fund Basics

Some quick fire facts about Index Funds for you –

 

  • An Index is a group of stocks that are related in some way – Country, market cap, sector, etc.

 

  • A Fund is a pool of investors money used to buy multiple investments.

 

  • An Index Fund buys all of the stocks in the chosen Index.

 

  • As the overall value of the Index rises or falls, so does the value of the Index Fund.

 

  • An Index Fund will be split into ‘units’ which are given a specific value, you can purchase them in a similar way to individual shares.
International index fund chart

Index Fund Benefits

One of the main reasons Index Funds are great is diversification.

Index funds give you easy access to virtually every market, as a result you can have a simple, balanced portfolio.

My first investments were a UK Index fund and and an International Index fund.

I have since added an Emerging markets Index, a UK smaller companies Index and a UK government bond Index.

Having my investments spread over these Index funds gives me exposure to hundreds of shares/bonds globally.

 


 

Index Funds are so easy to maintain that they fit perfectly with a minimalist approach to personal finance and investments.

A portfolio like mine from above can be set up in less than an hour and you can set up automatic payments into each of them every month. That is the ultimate set and forget approach to investing.

Index investing is cheap too, unlike shares, you don’t pay a dealing fee. There is always a ‘maintenance’ fee for all funds, this is really low for Index funds though. Some of  mine are as low as 0.04% annually!

 


 

A great book for this topic is Unshakeable by Tony Robbins. The book really goes in deep on the benefits of Index Investing over the long term, it also dives into diversification and portfolio allocation which I found really helpful. 

I highly recommend you check it out.

 


 

Buffett’s $1M Bet

If you still aren’t convinced that Index investing is a pretty viable way to grow your money then I will leave you with this quote from a forbes.com article. Warren Buffet won a million dollars by backing index investing to beat traditional mutual funds!

When investing, sometimes the best way to make money in the stock market over time is to do nothing. Just invest passively.
That’s what Warren Buffett did in making a $1 million bet that he could do better than a portfolio of hedge funds. Did the Oracle of Omaha find some great, bargain-priced stocks? Did he make the deal of the century by finding an emerging tech company?
Nope. He simply said that by investing in a boring, low-cost stock index fund you could outperform most hedge funds over the past decade. He made no new investments and didn’t time the 2008 market crash. He just stayed put in an index fund.

– Forbes.com

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