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Investing in Index Funds and ETFs

Index funds are mutual funds designed to track a specific index (the S&P 500 or the Barclay’s Capital Aggregate Bond Index, for instance). This is in contrast to most mutual funds, which are run by fund managers seeking to beat the market rather than just match it.

Because index funds seek only to mimic the performance of an index, they can be run for significantly lower costs than other, actively managed mutual funds. For example, the typical stock mutual fund carries an expense ratio of roughly 1%, whereas it’s easy to find stock index funds charging 0.2% or less.

Reasons for Investing in Index Funds

Because of their low costs, transparency, and broad diversification, index funds can be excellent tools for constructing a buy & hold portfolio.

The following articles explain in more depth exactly why more and more investors are turning to index funds to make up the majority of their portfolios:

Exchange Traded Funds (ETFs)

ETFs are essentially index funds that are bought and sold like regular stocks rather than like mutual funds. For buy and hold investors, the biggest differences between ETFs and index funds are that ETFs typically carry slightly lower expense ratios, but buying or selling them (usually) involves paying a brokerage commission.

The following articles can help you get up to speed on ETFs in case you think they might be a helpful tool for building your portfolio:

Example Index Fund/ETF Portfolios

The following articles contain example portfolios (constructed from index funds or ETFs) that may be helpful as a starting point as you build your own portfolio:

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