5 Questions to Ask When Buying Index Funds

By Chris Davis This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities. If your eyes glaze over when hearing the term “index funds,” you’re forgiven. But the dull, […]

By Chris Davis

This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

If your eyes glaze over when hearing the term “index funds,” you’re forgiven. But the dull, mathematical spirit of index funds is part of what’s made them such strong investment vehicles for decades running.

These vehicles are built to track various market indexes, which makes them an inexpensive and diversified option compared with, say, individual stocks. But that doesn’t mean that all index funds are built the same.

Keep in mind these five considerations when shopping for index funds:

1. What’s Your Investment Goal?

First, make sure to understand why you’re investing. Index funds are for long-term, hands-off investors, and often make up the backbone of retirement-focused portfolios. If you’re looking to tempt fate in the world of short-term stock trading, index funds won’t scratch that itch. 

>> Plus, from Robert Powell’s Retirement Daily on TheStreet: A Common Sense, Goals-Based, Approach to Your Investment Plan

But if you’re ready to get started, first assess your timeline. Will you need this money in five years? Ten years? Not until retirement? The longer your investment timeline is, generally, the more risk you can take on in the beginning, financial advisors say. And with more risk comes the potential for higher returns.

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