Investor's Perspective: Index Funds Explained

Eric K. Hudson

Managing Principal at Hudson Wealth Management

Published Mar 19, 2020

Have you ever heard of index investing or index funds, but you are not quite sure what that means?

Well, you are not alone and to improve your readiness as an investor we are going to uncover the meaning of index investing which is also known as index funds.

The stock market is made up of various different subsets known as indexes. Some of the most commonly known indexes on the U.S. stock market are Dow Jones, Nasdaq, and the S&P 500 index. This leads us to the meaning of an index fund. An index fund is a type of mutual fund that is designed to mimic or track the makeup of a particular index.

For example, an S&P 500 index fund is designed to mimic the performance of the actual S&P 500 index. The S&P 500 index is comprised of the 500 largest market cap U.S. based companies. Therefore, as an investor, an index fund will ideally give you broad market exposure to each of those 500 companies with low operating expenses across relatively stable businesses. Index funds can also be attractive to investors who do not have the time to evaluate entire businesses for individual stock picking.

Index funds can also be used as a core element of your portfolio holdings for retirement accounts such as 401(k)s and IRAs.

Keep in mind that index funds are not a one-size-fits-all approach for investing. In fact, no such thing exists. With that said, index investing may or may not be a good fit for you depending on your investment strategy and long-term objectives.

Therefore, always consult with your trusted advisor or feel free to reach out to me directly to assess your specific situation before you proceed with any investment decisions.

Take charge of your wealth!

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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.

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