Guide to Market Indexes

By Jon Scott

In this article we’ll cover:

  • Why invest in a market index

  • The most popular market indexes

  • How to invest in an index: ETF vs. Mutual Funds

I’m sure you’ve heard the key to wealth is real estate, but let’s talk about an investment that historically earns double the average annual returns of investing in a home. That investment would be the S&P 500, a market indexes.

Why invest in a Market Index?

For most long-term investors, a market index is going to be the most straightforward stock market investment. For example, if you invested $10,000 in the S&P 500 on the first day of trading of January 2001, that same $10,000 would be worth $50,900 by the end of 2021. Over a 20-year period, that’s a pretty hard number for anyone to beat.

The reason why indexes performed so consistently over the long-term relative to individual equities is because of diversification. Investing in an index is much different from buying shares in an individual company or even shares of a couple dozen companies because you’re typically getting a piece of hundreds, if not thousands, of companies with exposure to virtually every major industry out there.

But this can be a double-edged sword. If you happen to be a stock picking genius–or just get lucky–the individual stocks you select may do far better than the index, especially over the short-term. However, according to most experts, a non-professional has a very small probability of beating the market (which is defined as the S&P 500’s returns) over the long term. Even professional equity traders have a hard time beating the S&P. Still, if you have a good hunch about a stock or a couple of stocks (and you obtained that information legally), investing in individual stocks can possibly bring in larger returns than the indexes.

The Three Most Popular Indexes

How to invest in a Market Index

There are two main ways to invest in a market index a mutual fund or an ETF.

Mutual Fund

ETFs

How to invest in a Mutual Fund Market Index

Method 1: Do it yourself

  1. Log on to the mutual fund providers site, in the case of the Vanguard 500 Index Fund Admiral Shares (VFIAX), the site is located here.

  2. You will need to create an account to invest. Once this is completed you will need a minimum of $3,000 as a minimum purchase (for this specific broker and index).

Method 2: Go through an investment advisor

  1. If you do not have one already, find an investment advisor (many financial planners also serve as investment advisors) who can invest your money into a mutual fund.

How to invest in an ETF Market Index

  1. Open an account with a broker that allows stock trading.

    1. For example: Webull, Robinhood, Charles Schwab, E-Trade.

  2. Do your research to find a market index ETF that’s best suited for your investment goals.

    1. The best place to research is the ETF’s investment manager’s site. A good choice is the Vanguard S&P 500 ETF, ticker VOO.

  3. Log into your brokerage account and find the trading ticker and search for it.

  4. You should see the ETF appear, and the next step will be to buy the number of shares or dollar amount you wish to purchase.