Investing In S&P Index Funds ? Make Money Make Cents

Index Fees

The most important decision you will have to make when investing money, is choosing where to invest it.? Investors can choose anything from stocks and bonds to mutual funds and money markets.? One option that is simple and effective is an index fund, or more specifically, the S&P Index Fund.? Owning the S&P index fund means you own 500 of the most widely held stocks in the market.? Have you ever heard of Wal-Mart? They are a company that is included in the S&P.? How about AT&T, Walgreens, 3M, or McDonalds? Yep, they are in there too.

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?Index Funds Explained

When people talk about the stock market, they generally talk about the Dow Jones, the NASDAQ, and the S&P 500.? All three of these are indexes.?? An index is a group of stocks that represent a part of the stock market.? For example, the Dow Jones represents 30 of the largest blue chip stocks.? The NASDAQ is an index of technology and growth stocks.? The most followed index is the S&P?500.? The S&P 500 includes 500 leading companies in leading industries in the U.S. economy.? The S&P 500 is designed to be a leading indicator of US equities and reflects the characteristics of the large cap market.? The S&P 500 is the most widely used benchmark in the US stock market.

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Why choose an index Fund

If you had to choose the best stock of 2012, what would it be? How about a stock that will only increase in price for 2012? If you have ever tried to do this, it is harder than it sounds.? If you had invested in McDonald?s last January, you would be up around 31%.? Not bad.? How about AT&T? You would be at about a 2.7% gain.? I would be ok with that. It?s not a loss. Now let?s look at 3M.? You would have reported a loss of 3.5%.? Last but not least, let?s say you invested in Netflix.? You would have lost a whopping 60% of your money.? The point I am making is picking a winning stock is difficult.? Companies and individuals pay money managers millions of dollars in order to do this for them.? The S&P 500 tries to match the US stock market, which isn?t easy.? Less than 20% of actively managed funds have outperformed the S&P 500 in the past 10 years.? By investing in an S&P index fund, you are essentially investing in 500 of the best stocks possible.? That is a way to diversify your money in a wide range of stocks.? The effects of a poor performing stock are dampened because you have 499 others that could be doing well.

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ETF or Mutual Fund

If you choose to invest in an index, you have a couple of options.? You can invest in a mutual fund or an exchange traded fund (ETF).? A mutual fund is a professionally managed investment that pools funds from multiple investors to buy securities.? There are many mutual funds that mimic the S&P.? A few of the top mutual fund complexes are Vanguard, Fidelity, and American Funds.? All are highly recognized and offer a wide array of funds such as the S&P 500 Index fund.? Mutual funds can have high minimum investment requirements, but those can often be waived if you sign up for a reoccurring transfer to the fund.? The other option is exchange-traded funds.? The main difference between ETF?s and mutual funds is that ETF?s trade like stocks.? In order to buy and sell ETF?s you would need a brokerage account.? The symbol for the S&P 500 index fund is SPY.

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Cost Comparison

It is important to consider the fees that are incorporated in either fund you choose.? Mutual funds tend to be more expensive.? A few of the fees you will encounter with Mutual Funds are:

• ? ? ? ?12b-1 fee of up to 1% (pays for marketing and distribution)
• ? ? ? ?Front-end or Back-end load charges (basically a commission to enter the fund)
• ? ? ? ?Management fees (exactly what it sounds like)

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ETF?s do not include as many fees:

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• ? ? ? ?Management fees

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ETF?s will generally have less than 1% in fees, while mutual funds can have anywhere from .1-3% in fees.? If you decide on mutual funds, make sure to purchase no-load funds.? That means you will not have to pay a commission for purchasing or selling the fund.

If you are looking for a way to invest some of your money, and are willing to take the risk of owning stocks, the S&P 500 index fund is an excellent choice.? It gives you diversification, low costs, and simplicity.

Source: http://makemoneymakecents.com/2012/02/investing-in-sp-index-funds.html

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