The Asked

Chapter 03 — Money & Finance

What is an index fund and should I buy one?

An index fund holds every company in a market index, such as the S&P 500, in proportion to its size. It gives instant diversification at very low cost, and for most long-term investors it beats picking individual stocks after fees.

Follow-up questions

What's the difference between an ETF and an index fund?

Both can track the same index. ETFs trade during the day like a share; traditional index funds price once daily. Costs are now similar.

How much should I invest in index funds?

A common approach is a fixed monthly amount you won't need for at least five years, invested automatically regardless of market news.

What is a good expense ratio?

Under 0.20% is fine and the cheapest broad index funds now sit near 0.03%. Over 1% is expensive enough to matter significantly over decades.

Can you lose money in an index fund?

Yes — they follow the market down as well as up. Historically broad indexes have recovered, but drawdowns of 30–50% have happened and can last years.

Which index fund should I buy?

For US: VTI (total US market) or VOO (S&P 500). For global: VT or VXUS for non-US. Pick one or two, not twelve — overlap defeats the point.

What's an ETF vs a mutual fund?

ETFs trade like stocks intraday with usually lower fees and tax efficiency. Mutual funds price once daily. For most people, ETFs win.

Won't I miss out on bigger gains?

Maybe — but you'll also avoid the bigger losses. Over 20 years, the boring index portfolio beats the vast majority of active investors, professional included.

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