Morningstar Inc. studies show that, over time, index funds outperform most of the higher-cost mutual funds that the $19 trillion mutual fund industry peddles. And if you wonder about that, pick up a new book, The Investment Answer, cowritten by Gordon S. Murray, who spent a lifetime selling the fancier products that Wall Street offers. Yet, as he was dying of cancer, he wrote his book to tell people not to waste money on expensive funds and Wall Street strategies.
When the day ends, you hear newscasters say the stock market went up or down. They are referring to an index, or a collection of stocks observed daily to represent the stock market. It could be the Dow Jones industrial average, but more often the reference is to the Standard & Poor's 500.
Balancing act
That's a collection, or index, of 500 large U.S. stocks. The 500 stocks of the index expose investors to about two-thirds of the U.S. stock market and a chance to partake in the U.S. economy.
You can buy that mirror image of the stock market with a Standard & Poor's 500 index fund. So if you bought it and heard the next day that the stock market (S&P 500) rose 1 percent, it would mean you probably earned about 1 percent. If you heard the market went down 1 percent, you could assume you likely lost that much.
If you buy an index fund, you do not make bets on any individual stock. If one stock in the index is doing poorly, there is no fund manager at the helm dumping it. If other stocks are doing great, no fund manager loads up on the darlings.
