What is index investing?

There are lots of ways to approach investing, and one of them is index investing.

What is index investing?

First it helps to understand what an index fund is.  An index fund attempts to copy an existing market’s performance.  For example, there are index funds that mimic the NZ and US stock market, international stock markets and the bond markets. 

There are many index funds out there, tracking many different markets of all shapes and sizes. Each one shares the same basic principle: Its goal is simply to match that particular market’s return.
Index investing is therefore putting together a group of index funds to build an investment strategy – a portfolio.

Why is index investing effective?

There is a wide mix of different funds inside an index fund portfolio.  This wide mix reduces the risk for that index fund portfolio.  So if one share or bond’s value was down for the day or year, another is more likely to be up, which reduces the risk.

An index fund’s portfolio mix rarely changes, which results in lower management costs which can translate to lower fees.

Index investing can be an effective way to manage risk and gain consistent returns with modest fees.

Go back: how we manage investment