How to invest in index funds effectively

credit: Finance Jane

An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain rules so that the fund can track a specified basket of underlying investments.

The most commonly known index fund in the United States, the S&P 500 Index Fund, is based on the rules established by S&P Dow Jones Indices for their S&P 500 Index.

In this video three experts talk about how to invest in index funds. The first expert discusses the definitions of mutual funds, index funds and ETF.

The second expert talks about three disadvantages of index funds, which include high costs, a big portion of expensive stocks (big tech company stocks), and counterparty risks.

Counterparty risk is the probability that the other party in an investment, credit, or trading transaction may not fulfill its part of the deal and may default on the contractual obligations.

The third expert talks about the best way to invest in index funds – dollar cost averaging. This is exactly what John Bogle suggested. The ideal investment vehicle for him is a low-cost index fund held over a period of a lifetime with dividends reinvested and purchased with dollar cost averaging.

Warning: This video is to show you how to invest in index funds. Please do your research before doing any investment. A good balance between return and risk is the key to investment success.

Source: Finance Jane