{"id":2135,"date":"2024-01-27T08:03:04","date_gmt":"2024-01-27T08:03:04","guid":{"rendered":"http:\/\/localhost\/dpetkovski\/?p=2135"},"modified":"2024-07-03T18:48:32","modified_gmt":"2024-07-03T18:48:32","slug":"index-investing-index-funds-a-gentle-introduction","status":"publish","type":"post","link":"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/","title":{"rendered":"Index Investing &#038; Index Funds &#8211; A Gentle Introduction"},"content":{"rendered":"<p><strong>Index Investing<\/strong> represents an investment strategy which aims to track the performance of a <a href=\"https:\/\/dpetkovski.com\/stock-market-index-explanation-and-examples\/\">market index<\/a>.<\/p>\n<p>Not <em>&#8220;picking winning stocks&#8221;<\/em>, not <em>&#8220;timing the market&#8221;,<\/em> not <em>&#8220;beating the market&#8221;.<\/em><\/p>\n<p>This strategy is synonymous with <strong>matching the market<\/strong>\u00a0&#8211; at least the one you choose to match.<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_60 ez-toc-wrap-center counter-hierarchy ez-toc-counter ez-toc-white ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\" role=\"button\"><label for=\"item-668bb73e5352d\" ><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input aria-label=\"Toggle\" aria-label=\"item-668bb73e5352d\"  type=\"checkbox\" id=\"item-668bb73e5352d\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/#Index_Funds\" title=\"Index Funds\">Index Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/#Tracking_Error\" title=\"Tracking Error\">Tracking Error<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/#Difference_from_Stocks_and_ETFs\" title=\"Difference from Stocks and ETFs\">Difference from Stocks and ETFs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/#%E2%80%9CPassive_Investing%E2%80%9D\" title=\"&#8220;Passive Investing&#8221;\">&#8220;Passive Investing&#8221;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"http:\/\/localhost\/dpetkovski\/index-investing-index-funds-a-gentle-introduction\/#Conclusion_Summary\" title=\"Conclusion &amp; Summary\">Conclusion &amp; Summary<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Index_Funds\"><\/span>Index Funds<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>An <strong>index fund<\/strong> is a special type of an investment fund that aims to track the performance of an index.<\/p>\n<p>Unlike the <strong>actively managed funds<\/strong>, which try to outperform an index, the <strong>passively managed funds<\/strong> are usually <strong>tracking\u00a0<\/strong>one. That means that their performance will always be in line with the index&#8217;s performance. This is achieved by buying the securities from the particular index.<\/p>\n<p>For example, if an index fund tracks the S&amp;P 500, it would ideally have holdings in all companies from the index and in the same proportion.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tracking_Error\"><\/span>Tracking Error<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The tracking may not be perfect, so there may be some (small) differences in the performance of an index fund and the index itself.<\/p>\n<p>This is called a\u00a0<strong>tracking error<\/strong>.<\/p>\n<p>The reasons for this difference are various and include:<\/p>\n<ul>\n<li>Using a <strong>representative sample<\/strong> of the index&#8217;s components instead of all the securities<\/li>\n<li>Using a slightly different weighing than the index itself<\/li>\n<li>The fund&#8217;s <a href=\"https:\/\/dpetkovski.com\/total-expense-ratio-the-importance-of-keeping-it-low\">expense ratio<\/a> (i.e. higher fees being deducted from the portfolio)<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Difference_from_Stocks_and_ETFs\"><\/span>Difference from Stocks and ETFs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A fund&#8217;s price is determined once per day, after the market closes.<\/p>\n<p>This is called <strong>Net Asset Value (NAV) <\/strong>and is calculated by the last quoted daily price of all the fund&#8217;s holdings minus the fund&#8217;s expenses, divided by the number of outstanding shares.<\/p>\n<p>Also, index funds execute orders once per day. This is unlike stocks and <a href=\"https:\/\/dpetkovski.com\/etfs-exchange-traded-funds\/\">ETFs<\/a> which can be traded via brokers during trading hours.<\/p>\n<p>So investors can&#8217;t day-trade using funds. Some people consider this a disadvantage and some consider it an advantage.<\/p>\n<p>I consider it neither.<\/p>\n<p>This is how investment funds work and the investor&#8217;s decisions should originate from his <a href=\"https:\/\/dpetkovski.com\/dca-dollar-cost-averaging-investment-strategy-explained\">strategy<\/a>, not from operational restrictions.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"%E2%80%9CPassive_Investing%E2%80%9D\"><\/span>&#8220;Passive Investing&#8221;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The <strong>Index Investing<\/strong> approach is sometimes referred to as <em>&#8220;passive investing&#8221;<\/em>.<\/p>\n<p>It means that it&#8217;s more suitable for buy-and-forget type of investors. In other words, there&#8217;s no active portfolio management, frequent buying or selling, <a href=\"https:\/\/dpetkovski.com\/rebalancing-managing-your-investment-portfolio\">rebalancing<\/a>, or picking stocks.<\/p>\n<p>So whenever you hear someone talking about &#8220;passive&#8221; or &#8220;lazy&#8221; portfolios, investing &#8220;in the market&#8221; or &#8220;in stocks&#8221; (without mentioning specifics), they most probably refer to tracking a common market index. Most probably the S&amp;P 500 or MSCI World, for a more global diversification.<\/p>\n<p>At this point, it&#8217;s worth mentioning that\u00a0<strong>history shows that passive investing overperforms most active traders in the long run.<\/strong><\/p>\n<p>So given the limited amount of money, knowledge, and time most posses, matching an index would be <strong>the best strategy<\/strong>.<\/p>\n<p>Your only input is upfront &#8211; to determine which indices you&#8217;d prefer to track.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Conclusion_Summary\"><\/span>Conclusion &amp; Summary<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Index funds<\/strong> are a great investment vehicle for passive investors looking for a straight-forward way of maintaining their long-term portfolio.<\/p>\n<p>They also have lower costs than actively managed funds, as the portfolio management is simpler and they trade less frequently.<\/p>\n<p>This makes index funds a good option for buy-and-forget investors.<\/p>\n<p>Another way to get exposure to index investing is through\u00a0<a href=\"https:\/\/dpetkovski.com\/etfs-exchange-traded-funds\/\"><strong>ETFs (Exchange Traded Funds)<\/strong><\/a>.<\/p>\n<hr \/>\n<p><em>For a comprehensive, beginner-friendly, and <strong>free resource<\/strong> on stock market investing, visit:\u00a0<\/em><\/p>\n<p><a href=\"https:\/\/dpetkovski.com\/how-to-start-investing-a-complete-beginner-series\/\"><strong><em>How to Start Investing: A Complete Beginner Series<\/em><\/strong><\/a><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Index Investing represents an investment strategy which aims to track the performance of a market index. Not &ldquo;picking winning stocks&rdquo;, not &ldquo;timing the market&rdquo;, not &ldquo;beating the market&rdquo;. This strategy is synonymous with matching the market&nbsp;&ndash; at least the one you choose to match. Index Funds An index fund is a special type of an&nbsp;&hellip;<\/p>\n","protected":false},"author":1,"featured_media":2137,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16,17],"tags":[],"ppma_author":[4],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Index Investing &amp; Index Funds - A Gentle Introduction - D. Petkovski<\/title>\n<meta name=\"description\" content=\"Index Investing is the foundation for building a passive investment strategy. 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Petkovski \ud83d\udcd3 Author\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Husband &amp; Father Software Engineer\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0StrengthCentric Bitcoin Hodler\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0DeFi Veteran \u00a0 \ud83c\udf0d Everything Enthusiast \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\ud83d\udd25 Optimist Revolutionizing ideas. Simplifying complexity. Sharing knowledge.","sameAs":["https:\/\/facebook.com\/dpetkovski","https:\/\/www.instagram.com\/strengthcentric\/","https:\/\/twitter.com\/petkovskix"],"url":"http:\/\/localhost\/dpetkovski\/author\/petkovski\/"}]}},"authors":[{"term_id":4,"user_id":1,"is_guest":0,"slug":"petkovski","display_name":"D. Petkovski","avatar_url":"http:\/\/0.gravatar.com\/avatar\/?s=96&d=mm&r=g","user_url":"","last_name":"","first_name":"","description":"<span style=\"font-size: 23px\">D. Petkovski<\/span> <br> <br>\r\n\r\n\ud83d\udcd3 Author\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\"><img class=\"emoji\" role=\"img\" src=\"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/svg\/1f46a.svg\" alt=\"\ud83d\udc6a\" \/> Husband &amp; Father <\/span>\r\n<br>\r\n<span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\"><img class=\"emoji\" role=\"img\" src=\"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/svg\/1f5a5.svg\" alt=\"\ud83d\udda5\ufe0f\" \/> Software Engineer\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 <\/span><span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\"><img class=\"emoji\" role=\"img\" src=\"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/svg\/1f4aa.svg\" alt=\"\ud83d\udcaa\" \/><\/span><span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\">\u00a0StrengthCentric <\/span>\r\n<br>\r\n<span class=\"r-18u37iz\"><img class=\"r-4qtqp9 r-dflpy8 r-zw8f10 r-10akycc r-h9hxbl r-9cviqr\" src=\"https:\/\/abs.twimg.com\/hashflags\/Bitcoin_evergreen\/Bitcoin_evergreen.png\" alt=\"\" width=\"20\" height=\"20\" \/> <\/span> Bitcoin <span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\">Hodler\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0   \u00a0                            \u00a0 \u00a0 \u00a0<\/span><span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\"><img class=\"emoji\" role=\"img\" src=\"https:\/\/s.w.org\/images\/core\/emoji\/14.0.0\/svg\/1f4c8.svg\" alt=\"\ud83d\udcc8\" \/><\/span>\u00a0<span class=\"r-18u37iz\">DeFi<\/span><span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\"> Veteran <\/span><span class=\"css-1qaijid r-bcqeeo r-qvutc0 r-poiln3\">\u00a0<\/span>\r\n<br>\r\n\ud83c\udf0d Everything Enthusiast              \u00a0 \u00a0 \u00a0 \u00a0   \u00a0 \u00a0 \u00a0              \u00a0   \u00a0\ud83d\udd25 Optimist <br><br>\r\n\r\nRevolutionizing ideas. Simplifying complexity. Sharing knowledge. \r\n"}],"_links":{"self":[{"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/posts\/2135"}],"collection":[{"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/comments?post=2135"}],"version-history":[{"count":11,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/posts\/2135\/revisions"}],"predecessor-version":[{"id":3448,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/posts\/2135\/revisions\/3448"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/media\/2137"}],"wp:attachment":[{"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/media?parent=2135"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/categories?post=2135"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/tags?post=2135"},{"taxonomy":"author","embeddable":true,"href":"http:\/\/localhost\/dpetkovski\/wp-json\/wp\/v2\/ppma_author?post=2135"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}