Index Funds

Before spending hours researching various mutual funds, one thing you should ask yourself is if you are just better off investing in an index fund. An index fund is just like a mutual fund, except it just passively invests in the securities that form a popular index.

For example, Fidelity Spartan 500 Index Investor (FSMKX) is an index fund that invests in stocks that are in the S&P 500 index. The fund's managers just keep the portfolio mirrored to the index. Since there is less work involved, the expense ratio is a minimal .1%!

Most mutual funds underperform the market for several reasons. First, the expenses themselves are costly, and most mutual funds cannot overcome them through better investing. Second, the size of most mutual funds makes it difficult to beat the market. Even if they think a stock is wonderful, they may only be able to invest 2% of their assets in the stock. Even if they invest just 2% of their assets in the stock, this is generally so much money that it puts upward pressure on the stock's price, so the fund ends up buying the stock at a much higher price than when it first targeted the stock.

Since most mutual funds underperform the market, index funds are gaining greater and greater popularity. Instead of trying to beat the market, these funds just match the market minus a small fee that is generally under .25%.

Here are a few index funds to look into:

Fidelity Spartan 500 Index Investor (FSMKX) - As stated above, this fund tracks the S&P and has a particularly low expense ratio.

Vanguard Total Stock Market Index (VTSMX) - This fund tracks all US equities. At an expense ratio just under .2% (last time I checked), this fund is a good way to get the ultimate diversification of US stocks.

Vanguard Small-Cap Growth Index Fund (VISGX) - This fund invests in small cap growth stocks. Expense ratio under .25% last time I checked.

There are many index funds available for a variety of stock types. If you want to keep it simple, just going with a total stock market index like VTSMX is simple and effective, though you might want to allocate a portion of your portfolio to an international index fund as well.