Written by Katie Gomez

The number-one question everyone asks is: ‘What should I invest in to make the most money? This question is problematic because it can be answered from multiple perspectives. However, the better questions you should ask are: What am I more equipped to invest in at this stage in my life? Which investments can fulfill my current goals and timelines? Or, given the economic circumstances, how can I minimize risk and invest safely? 

While my blogs usually cover why trading is beneficial and how you can implement it into your life, I wanted to use this week’s article to dive a bit deeper into your other options for investing right now as we start to shift our focus to more long-term benefits awaiting us at the end of this recession. 

Trading in the current market is risky, especially as we move deeper into this recession. People are getting frustrated, which makes it an ideal time to focus on long-term investing. Therefore, there is no better time to start focusing on long-term investing to set you up after the recession is over instead of using up all your money and energy in short-term trades for immediate gratification.

Investing is about intention. How can you organize your actions to serve your current goals and purposes? Therefore, before diving into random stocks and bonds to invest in, self-awareness/introspection is a great place to start. Contrary to popular belief, investing is not based on intelligence but on one’s commitment to learning and staying mindful in the process. Investing can seem overwhelming to those newer or more inexperienced in the process, but it can actually be relatively straightforward. Instead of individuals focusing on which individual stock to pick from a sea of options, they can narrow their search with the help of index funds. . 

Index funds track a particular market index, typically composed of stocks or bonds. These funds tend to invest in all the components included in the index track, so they are less focused on individual investments and more concerned with the sector as a whole. Index funds can help you repurpose, restructure, and diversify your portfolio, all of which contribute to protecting your profits in the long run. Index funds make it virtually impossible for you to fall into the trap of overestimating individual stocks and investing too much of your assets in singular companies. Instead, index funds use fund managers to ensure that the entire fund performs the same as the index. 

Index Fund Beginner Tips

So how exactly does one start investing in index funds?

Step #1: Pick an Index

Of course, the S&P 500 index is the most well-known, as it covers the top 500 U.S. companies in the stock market, but there are plenty of other funds to keep your eye on as a newer investor to maximize your profit potential. For instance, other lesser-known but top-performing indexes to consider include the S&P Small Cap 600 and the Bloomberg Barclays Global Aggregate Bond. Alternatively, if you prefer to avoid larger, broader indexes… In that case, you can search for sector indexes tied to specific industries, indexes targeting stocks in single nations, and style indexes emphasizing fast-growing companies or value-priced socks. (Frankel, 2023). 

Step #2: Decide which fund best suits your index. 

For those with more than one index fund option for your chosen sector, you must be able to decide which index fund most closely tracks the index’s performance and which has the lowest costs. You also must be able to identify any possible limitations or restrictions on an index that prevent you from investing in it. If you can do these things, you’ll better understand which index fund will fulfill your goals and intentions. Investing is all about a process of elimination to find the best possible investment for you and your needs.

Step #3: Start Buying Shares 

You have two options: either open a brokerage account to buy shares of your selected index fund or open a direct mutual fund account with the company offering that fund. If you plan on investing in multiple indexes that fund managers provide, it is probably in your best interest to go with the brokerage account; that way, you can diversify and have more control over your investments by combining them all into one account for you to oversee.

Index funds are significantly important for new investors for several reasons. These investment vehicles offer a way to enter the stock market that is relatively straightforward, accessible, and productive, making them an excellent choice for anyone just starting on their investment journey. Index funds benefit new traders through diversification, exposure to new sectors, and branching out into the market. 

Due to their diversified nature, index funds are also less risky than investing in individual stocks because the performance of your portfolio is no longer directly correlated to the performance of a singular company. Additionally, it can be incredibly challenging for those just joining the market to read it well enough to pick out individual stocks, at least starting. Hence, these funds make it a lot easier to select for them.

For my plant lovers, a good way to think about stocks is to compare them to fiddle leaf plants: they are lovely to look at and show off, but they require incredibly high maintenance. On the other hand, index funds are more similar to snake plants, needing the occasional tending to but best left on their own most of the time. You want your investments to be as low maintenance and cost-efficient as possible, like the snake plant, especially if you still risk money in other ventures like trading. Index funds typically have lower expense ratios (fees) compared to actively managed funds. Index funds require minimal management effort, unlike stocks requiring constant active monitoring. 

Index funds also serve as a great learning opportunity for those not quite ready to dive into the market head first and run the risk of stock trading. This type of long-term investing allows them to get familiar with how the market functions, observe market trends and their impacts on their investments and gain confidence in their ability to invest over time. Lastly, index funds are highly liquid in that investors can easily get in and out by buying or selling shares whenever they need access to their money. This flexibility is crucial to new investors, who may need to enter and exit the market quicker to tend to other financial goals or obligations outside the market. 

In conclusion, if you have been focused on short-term gratification trading offers, it may be time to switch and try investing. Index funds are newer investors’ best bet to build wealth over time as they provide an accessible, diversified, and lower-cost option. They offer a solid foundation to create a well-rounded investment portfolio while gaining the necessary exposure to the stock market while minimizing risk. Take advantage of long-term growth opportunities by investing in index funds. Visit Trade Ideas to figure out how to start investing (the right way).  

References:

 https://www.fool.com/investing/how-to-invest/index-funds/