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You put money into an IRA or 401k, now what?!?! Index Funds.
- Adithi Volunteers
- Apr 6
- 3 min read
A huge thing people mess up is they forget that Roth IRAs, 401k’s, and other employment or investment accounts are ONLY storage accounts, YOU need to take the next step into investing that money. Unfortunately, the government does not do it for you, however, it lets you have the freedom to pick which one you want. One of the funds people purchase in their account are index funds.
An index is a grouping of stocks, bonds, etc. For example, the S&P 500 is an index of the 500 largest publicly traded companies. So you would find Apple, Google, and Starbucks 😜 on this list. You CANNOT directly invest in an index but rather need to go through index funds. By definition, index funds are a type of mutual fund or exchange-traded fund (ETF) that aims to mimic the performance of a certain index. OR in short words, the money you put into an index will buy stocks of each of the many companies in that group and MIRROR the performance of them.
However, as there is with everything in life, there are some cons 😔
Lack of flexibility
If the index has a stock that you don’t think is going to perform well, you can’t remove it. It’s take it or leave all of them. It also applies to when a single stock is doing bad, you can’t sell off your losses. (Kinda sucks I know).
Cannot perfectly mirror the growth
For example, if the S&P 500 grows by 7%, you may take away 6.95% because the other .05% is for the people who keep the index fund up and running. (Lowk I’d want to get paid too if I was in their shoes).
There are also many advantages worth mentioning! An index fund is all passive investing, which means you don’t have to baby it, but rather let it do the work on its own. It also can help if you do not have time to research stocks and want a dependable bundle.
It allows people who aren’t keeping up with sectors or have a hard time reading financial statements to choose index funds that they trust to do well. It’s relatively stress-free and again YOU DON’T NEED TO WATCH IT CONSTANTLY. It’s like a cactus that gives mangoes. You don't need to water it and it gives off sweet treats. Good analogy, am I right? 🙂
HOWEVER, passive investing does sometimes do worse than active management (where people will deliberately change their stocks to keep up with market), especially in market recovery phases. But it is a great option for beginners.
Index funds also allow for diversification. Which means less risk and a larger portfolio. You’re not keeping all your eggs in one basket for the chance that one of them may become THE golden egg.
Another beautiful aspect of index funds is that you can buy stocks that are more targeted as well. For example, say you have many stocks in technologies but less in the food business. WELL, you can buy individual or more target index funds in food companies to diversify your portfolio even more. YAY!! Its highly recommended you do this as well.
Most index funds don’t have any minimums required but may have fees. So always check to see whether the fees are worth it for the return you may get. Also important to note, index funds can be purchased by buying shares of the index fund through either a brokerage account or a retirement account. Most retirement accounts are not taxed, WHIPPI KAI YAY! However, the same cannot be said with brokerage accounts and it is important to check which applies to your specific account type.
Index funds are a great beginner-friendly investment, especially for their dependability and diversification (alliteration is giving!). However, to become the next Warren Buffet or Iron Man, index funds alone won’t allow you to do that. So stay tuned for the next stock posts to become the Rich Grandma, Iron Man, Warren Buffet, and all the other rich people!
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