Index Funds Definition & Investment Strategy

What are Index Funds?

Index funds mimic the movement of the index in which it follows.  The index can follow the respective market by using two methods: (1) buying every stock in the index and weighting it appropriately, and (2) buy a select group of stocks which best represent the sector.

History of Index Funds

The first index fund was created by John Bogle of the Vanguard Group.  Bogle came up with the idea that it would be better to create a fund which mirrored the larger market, because this approach overtime had shown to perform better than stock picking.  Bogle's fund later became known as the Vanguard 500 Index Fund, with over 100 billion in assets.

How are Index Funds Managed?

Index funds are not actively managed like other mutual funds, where managers will add and remove stocks on a weekly or monthly basis.  Index funds mirror the respective index, so unless there is a change in the index, there will be no change in the fund.

Index Funds and Your Portfolio

Index funds are a good part of any asset mix for an investment portfolio.  Since the stock market has returned an average of 12% over the last 50 years, an index fund is a great part of a long-term investment strategy.  The recent credit crisis of 2008 has brought many indices to their knees, but over the long haul it is a sound investment strategy.