Index Funds for Beginners: A Step-by-Step Guide to Passive Investing

In this video, I explain everything you need to know about index investing to start you on your investing journey!

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Chapters

00:00 Start Here
00:42 What is an index fund?
01:50 How an index fund works
02:53 The Pros of Index Funds
04:27 The Cons of Index Funds
06:30 Choosing The Right Index Fund
09:44 Opening A Brokerage Account
11:02 Buying An Index Fund

The best way to grow your money in the stock market is through what Warren Buffet calls, "His favorite investment" or index funds. In this video, I explain everything you need to know about investing in index funds.

What is an index fund?

In order to understand what an index fund is, it's best to first understand what a stock is. When you buy a stock, you are buying a single company that is represented by a ticker symbol like Apple or AAPL. Whereas when you buy an index fund, you are buying one fund that is composed of a diverse group of stocks that tracks a market index like the SP500.

How an index fund works

Understanding how an index fund works is very simple. An index fund simply mirrors a market index like the SP500. So whatever the market index produces, the index fund will also produce. For example, if the SP500 goes up 1%, then the your index fund will also go up 1%.

The Pros of Index Funds

There are pros and cons to index investing and first let's talk about the pros. The first pro is that it is a lower risk investment. Instead of the performance being based on a single company like a stock is, it is based on a diverse portfolio of stocks. The second pro is long term growth potential. In the long term, the market has averaged a 10% return a year, and although this is not guaranteed, the potential of getting a return on your investment is very high. The third pro is it is a passive investment. Index investing does not require any work from you. All you have to do is simply buy and hold.

The Cons of Index Funds

Although index funds are a great investment, they do come with some cons. The first con is that you will not beat the market. If you are trying to beat the market, which is very difficult, you will not do it through index investing. The second con is slow growth. Building wealth through index investing takes time and if you are trying to do it quicker, you have to chose another investment. The third con is it's boring. If you are trying to get a thrill through investing, you will not get it as index investing is a passive form of investing.

Choosing The Right Index Fund

In theory all index funds should perform the exact same because they are all tracking the same index (in the case of this video, the SP500). However, there are some things you want to consider when deciding which one to choose. The first thing to consider is the minimum investment amount. Depending on how much money you have, it could limit which funds you can buy. The second thing is a transaction fee. Normally, if you buy an index fund outside your brokerage, you will encounter a fee. That said, whatever index fund you choose, should also be your broker. The third thing is the expenditure ratio. You do have to pay a small fee, but strive to keep this fee under .05%. The final thing is if it is an index fund or an ETF. ETFs are very similar to index funds, so make sure you are not buying an ETF.

Opening A Brokerage Account

Once you decide which index fund you want to index with, next you need to open a brokerage account or investment account. Simply go to Charles Schwab, Vanguard, or Fidelity and open an account.

Buying An Index Fund

Once you open a brokerage account, you can finally buy an index fund and begin investing. In the video, I show you how to buy one using the Schwab interface.

**This video is intended for entertainment purposes only, none of it should be interpreted as financial advice. Links above are affiliate links where if you click and order, I will receive a commission at no cost to you. **

[ElAgustin]

I'm wanting to make more educational "how to" style videos. What are some topics you are interested in me making?

[SCOTTDisick-ycx]

I did lots of backtesting and found that 20% SCHD/DGRO, 20% VGT/QQQ/SCHG 20% VOO and 40% bonds or 4%+ money market matches the growth of SP500 in up years but reduces the losses in down years by 40-60%. I'm still looking for companies to make additions to my $350K portfolio, to boost performance. Here for ideas...

[MauveHarris]

My spouse and I are adding a variety of stocks/ETF to my present holdings for the long term, We've set aside $250k to start following inflation-indexed bonds and stocks of companies with solid cash flows with the help of our FA Dianne Sarah Olson., I believe it is a good time to capitalize on the market for long-term gains, but it wouldn't hurt to know means of actualizing short term profit.

[PMackenzie-vwwb]

These are very valuable info. Unfortunately, most people who will watch this video will not really be able to apply the knowledge embedded in it. We may not want to admit, but as Warren Buffett once said, investing is like any other profession-- it requires a certain level of expertise. No surprise that some people are losing a lot of money in the bear market, while others are making hundreds of thousands in profit. I just don't know how they do it. I've got $200k set aside to put in the market.

[micheal_mills]

I've heard that index funds and ETFs provide diversified stock market exposure while spreading risk. I have over $800K in savings; What's the most effective strategy to allocate funds in my portfolio and generate profits?

[Vikturneer]

This time last year I considered getting into index funds without much knowledge and decided to have a consultation with a fiduciary, and it was incredibly insightful. One year down in, I truly cannot stress enough how helpful experts in this field are!

[larrydimon]

This should be shown and taught in schools it’s so important for young people to realize the value in financial freedom and not be tied up to bad debt.

[CharlotteAmeliaCY]

Its worse here, our economy is like a flailing fish, fighting for its life. The normal state of the U.S. economy is actually very bad. Because of this it goes into convulsive spasms fighting to grow any way it can out of desperation. Tricks, gimmicks, rule changes try to stimulate the economy and prevent it from falling but they only bring temporary relief to people since, when you factor in inflation we are declining.

[amyshhhh]

This is the most helpful video I have ever seen about investing. Thank you so much!!!

[leeallsopp]

Great vid once again dude! Nearly at 80k 😎👍

[danicegewiss]

I buy ETF's which are very similar to Index funds. They're just purchased at different times, to put it simply.

[robyn_southafrica]

Just a heads up at 12:34 re-edit the video, can see your Roth IRA #!! Anyways great video!!!

[bthomas]

Great information Austin. I am thinking I need to start an account for index funds to go along with my 401K and Roth IRA.

[quibblegaze]

0:00: 💰 Passive income through index funds explained with examples.
3:03: 💰 Advantages of index funds: lower risk, long-term growth potential, passive investing.
6:04: 💡 Factors to consider when choosing an index fund for investment.
9:07: 💡 Consider key factors when choosing an index fund and opening a brokerage account.
11:59: 💰 Maximize growth by reinvesting dividends in index funds for tax benefits.

Timestamps by Tammy AI

[CrossFitterinRealtime]

Gracias Agustín, saludos desde Dublín 🇮🇪😃

[sudeeppoonoth]

Austin, you are the best! Never felt so much happy with your simple explanation of topics which I thought is always confusing…wish I could talk to you to learn more. Thank you.

[debbiewalker]

You explained it so well. If I can understand it, anyone can ! Thanks Austin ! 😃

[KarenRB]

Thank you Austin! This is what I was looking for. I used to invest but had gotten out of it. But for my retirement, I've been doing more research. Thank you

[kerrm_music]

This is the simplest video on YouTube I have encountered regarding investment! Well done on your communication and clarity.

[minstreltokunbo]

if you already have a brokerage account with your employer should you use it or open a new one. i also was wondering why you put mostly put fidelity first and then charles schwab (the one you use). Did you place them in order of value, since the order of placing them alphabetically is not working in this case?. thank you for the video