investing 2026-04-21
Index Funds Explained
Why low-cost index funds outperform most active managers over decades.
Index funds buy every stock in an index proportionally.
How They Work
A fund tracking the S&P 500 holds all 500 stocks weighted by market cap.
Why Costs Matter
A 1% fee compounds over 30 years at 7% returns:
- 0.04% expense ratio (VTI)
- 1.0% expense ratio
- Difference: roughly 22% of final wealth
Common Indices
- S&P 500
- Total US Market (VTI)
- MSCI EAFE
- Emerging Markets
- Total Bond Market
Three-Fund Portfolio
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60% Total US Stock Market
30% Total International
10% Total Bond Market
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ETF vs Mutual Fund
Both offer index exposure. ETFs usually more tax-efficient in taxable accounts.
Common Mistakes
- Picking too many funds (overlap)
- Tracking errors
- Leveraged or inverse ETFs
- Selling during downturns