Index Fund
A fund that passively tracks a market index, offering broad diversification at very low cost.
An index fund holds the same securities as a benchmark index, such as the S&P 500, aiming to match its performance rather than beat it. Because there is no active stock-picking, management fees are minimal, often a fraction of what actively managed funds charge. Decades of data show that low-cost index funds outperform most active managers over the long run. They are the cornerstone of passive, buy-and-hold investing and pair naturally with dollar-cost averaging. An ETF is one common way to hold an index fund.
Example
A broad index fund with a 0.1% annual fee costs just $10 per year on a $10,000 investment, versus $150 for a typical 1.5% actively managed fund.
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Related terms
ETF (Exchange-Traded Fund)
A fund that holds a basket of assets (stocks, bonds, or commodities) and trades on a stock exchange like an individual stock.
Dollar-Cost Averaging (DCA)
An investment strategy of regularly investing a fixed amount regardless of market price, reducing the impact of volatility over time.
Diversification
The practice of spreading investments across different assets, sectors, and geographies to reduce the impact of any single investment's poor performance.
Asset Allocation
The strategy of dividing investments among different asset classes — stocks, bonds, real estate, cash — to balance risk and return according to your goals and risk tolerance.
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TER (Total Expense Ratio)
The yearly cost of owning a fund, expressed as a percentage of your invested amount.
Compound Interest
Interest earned on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
FIRE (Financial Independence, Retire Early)
A financial movement focused on aggressive saving and investing (often 50–70% of income) to achieve financial independence and the option to retire decades earlier than traditional retirement age.
Net Worth
The total value of all your assets (cash, investments, property) minus all liabilities (loans, mortgages, credit card debt).
Dividend Yield
The annual dividend payment of a stock or fund expressed as a percentage of its current price.
Portfolio Rebalancing
The process of realigning portfolio weights back to a target allocation by selling overweight assets and buying underweight ones.