Index funds in plain English

An index is a list of companies chosen by a fixed rule, like the 500 large US companies in the S&P 500. An index fund simply buys everything on that list. You don't need to guess which company will win; you own them all.

Why so many people start here

• Diversified: one purchase spreads your money across hundreds of companies.
• Low cost: no team of stock pickers to pay, so yearly fees are often under 0.1%.
• Simple: there's little to research or trade, which keeps emotions out of it.

Fees compound too

A fund's yearly fee is called its expense ratio. On $100,000 growing 7% a year for 30 years, a 0.05% fee leaves about $751,000; a 1% fee leaves about $574,000. Same market, $177,000 apart.

What to watch for

• An index fund still falls when its market falls. Diversification spreads risk; it doesn't remove it.
• Check what the index holds: a broad market fund is very different from a narrow sector fund.
• Hold it in the right account: tax-advantaged accounts first for most retirement saving.