Passive Income: Investing In Index Funds For Beginners

If you have no clue what an index fund is or how to invest in one, in this post, I answer 7 questions that briefly cover all you need to know to start investing.

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Disclaimer: I am an engineer. I have nothing to do with finances and I do not give any financial advice. Thank you.

Let me begin by saying that investing in the stock market is one of the topics I have been avoiding to get into (there’s a list of them) because of how intimidating it felt. I had absolutely no clue what to do with this and every time I try to read about it, I get a headache!

However, eventually, I reached a dead end because I couldn’t find another topic for this week. And I figured I’ll have to get into this eventually if I wanted to properly create a diversified investment portfolio.

If you look at any established investor, you will find that they have to have money in the stock market, one way or another.

Diversification is a protection against ignorance.

Warren Buffett

But since I am a beginner, I’m not going to jump in and start buying individual stocks all by myself, then cross my fingers and hope for the best. I figured I should start with the beginner’s level for stock investments: Index Funds.

Investing in index funds is the easy and safer route to take if you want to invest in the stock market but lack the experience and knowledge it takes, or if you simply don’t feel like taking the risk.

And it seemed like the second best investment to get into after real estate for me. So I decided to look more into this as someone who has never been anywhere near the world of stock market.

If you too have no idea how to start in this kind of investment and maybe considering giving it a try, then this post is for you.

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What are index funds?

An index fund is a type of mutual funds, it is like a collection of funds that follow the performance of a number of different markets/companies, packaged together into a single fund called an index fund.

So, instead of making a choice and buying a fund in individual stock (which requires a great knowledge of that specific stock and its chances of rising or falling in price), you buy a bunch of them into one single fund.

This means more exposure to the stock market, however, with less risk.

Who should invest in index funds?

Anyone can invest in index funds, you don’t need to have extensive knowledge in the stock market as a whole.

You do, however, need to have some basic understanding of how this works and how to choose where to buy your index funds and which funds to buy.

The lower the price of the fund and the account expenses, the higher the profit you will make. And the more broad and diverse the stocks held by the index fund, the less likely you are to face losses.

You also need to know that investing in index funds is mostly a long term investment. Meaning that you need to be willing to hold on to that fund for a while (5-10 years and sometimes more) before you see real profits.

This is usually the long-term investment suggested for retirement, similar to retirement accounts.

What are the types of index funds?

Index funds can be classified into:

  1. Stock index funds
  2. Bond index funds
  3. Commodity index funds

In this post, I’m mainly focusing on the stock index funds. However, I briefly went over the commodity ones in both Investing In Gold (ETFs & stocks)and Investing In Real Estate (funds). You can check them out for a quick overview.

As for stock index funds, these can also be classified into a number of types:

1. Broad market index fund

This is when an index fund is following the performance of an entire market. Famous examples of such funds are ones following the performance of the S&P 500 or Dow Jones.

2. Sector index fund

This is an index fund that follows the performance/profits of a certain industry in the country, such as the banking sector, the real estate sector, or a more broad sector like technology, etc.

3. International index fund

This one is an index fund that follows a number of companies from different countries.

It does not follow the performance of the stock market of these countries, but the performance of the companies whose stocks are part of the fund.

4. Global index fund

This follows the performance of the stock market of a number of countries. This index fund has main stocks from different nations, such as the FTSE 100 for Britain or the EGX 30 for Egypt.

How to choose an index fund?

There are a few things you need to consider and decide on before you take the step and buy an index fund.

Type

First thing you need to decide which type of stock you want to follow.

Do you want to follow the global stock for multiple countries? Or would you rather go for a certain industry’s performance, like banking? Or ones that track currencies or metals, like gold and silver?

There are plenty of options, and if you are not sure which one is to choose, you should go for ones that cover a bigger and broader market.

Fees

Before you buy an index fund, you should check first what kind of fees you will need to pay.

There are commission fees that gets deducted from your profits periodically, you may need to check the percentage and see if it is low enough for you to still be making a profit.

There are also some brokers or index fund companies that charge you to create an account, you will also want to consider this charge.

One last thing is the trading charges. How much you will need to pay to buy or sell your funds (you can buy or sell an index fund at the end of the trading day only).

Broker

In most cases, you will need to buy a certain index fund through a broker or a brokerage firm. You can invest through a brokerage firm locally or go with an online broker.

It is important that you first research this broker and read what other clients have to say about their service.

You can read more about how to choose the right broker here. Or you can find out about international online brokers instead.

How much money do you need to invest in index funds?

Investing in an index fund is known for its low cost. And this is because it is basically holding all the stocks in one package instead of hiring a professional to pick the right stocks to buy. So, that leaves you with not much expenses to pay.

The price for an index fund varies based on where you are buying it from and which fund type you are going to invest in.

Some index funds has no minimum amount required to start and others can have a minimum starting amount of $2000, $3000, or more.

So you can invest with an amount anywhere between $10 and $10,000. But it goes without saying that the more money you put in, the more profit you will make along the years.

However, you can start out with a small amount and keep adding to it every few months or so. You can check this list of the cheapest index funds to buy.

If you invest in a very low cost index fund-where you don’t put the money in at one time, but average in over 10 years-you’ll do better than 90% of the people who started investing at the same time.

Warren Buffett

What are the best index funds to buy in 2019?

Since I’m no expert, I did what any beginner would do and started doing research. And I found that there are a number of index funds that are always at the top of every list of best index funds to invest in. They are mostly the ones with the lowest fees and low to moderate charge for opening an account.

This is a list of index funds that are suggested by most stock experts/advisers (in order from lowest to highest annual expense ratio).

  1. Fidelity Spartan 500 (0.015%)
  2. Schwab S&P 500 (0.02%)
  3. Schwab Total Stock Market (0.03%)
  4. Vanguard S&P 500 (0.04%)
  5. iShares Core S&P 500 (0.04%)
  6. Vanguard Total Stock Market (0.04%)
  7. Vanguard Total World Stock (0.10%)
  8. Bloomberg Barclays High Yield Bond (0.4%)

Some of these funds you can invest in from anywhere in the world; however, depending on your country, you may need to invest through a local brokerage firm and not directly through the index fund provider.

What are the available index funds in Egypt?

As one of the largest and most developed countries in the MENA region, Egypt has a huge potential for economical growth and many opportunities for investment.

If you are a resident of Egypt and want to know which funds you can invest in locally, or if you are not a resident and simply want to invest in funds in Egypt, below is a list of some of the funds you can consider:

You can also check this article out to have an idea of the top ranking funds in Egypt for this past year and how much profit each made.

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Till next week, happy days!

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Author: Ray

Because a goal is a dream with a deadline, I started my one-year journey to achieving financial freedom. On those rare hours of day when I'm not working on that goal, I'm writing fiction, watching a film, or feeding birds.

7 thoughts on “Passive Income: Investing In Index Funds For Beginners”

  1. Erin, you’re the best! This was indeed a dreadful topic to read about and prepare; but, like you, I decided to push myself out of my comfort zone and learn. Because that’s the point of this blog! And so I just kept telling myself, “You’re not stupid, you’re the smartest and you can learn anything!” xD and surprisingly that made it easier!
    But knowing that someone actually reads and benefits from this too, that makes me so so happy!
    Thank you so much for taking the time to read and for not surrendering to your comfort zone!

  2. You are seriously awesome.

    This is what happened tonight:
    I looked up your blog with excitement for knowing I was about to learn something.
    I saw the title, and I immediately kind of cringed thinking this was going to be too much thinking for me tonight.
    I chose to avoid your post and went to check emails.
    I decided- NO, I am going to push myself out of my comfort zone.
    I read your first paragraph, and I immediately related to your avoidance and honesty of the topic.
    I read through, and I learned a lot.

    I really love the list of index funds with the expense ratios included. You share such valuable information.

    Thanks, Ray.

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