How to Invest in Index Funds [New Step-by-Step Guide 2021]

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the millennial money woman blog post "how to invest in index funds"

In this article

Wondering how to invest in index funds?

Then you’ve come to the right blog post.

Today I’m going to be discussing one of my absolute favorite – and simplest – strategies to make your million-dollar goal become a reality.

Let’s get started!

Index fund investing, in my opinion, is:

  • The safest
  • The greatest
  • The most stress-free

…way to invest in the stock market.

Hands down.

With index investing, you can win even if you don’t have:

  • Investing experience
  • Investing knowledge
  • Time to monitor your investments

Even better?

What if I told you, that you could see higher returns than the Wall Street hedge funds with this index investing strategy

the millennial money woman blog post "s&p500 performance statistic"

Image: The Millennial Money Woman | Source: Investopedia

If you set aside 15 to 30 minutes of your time, you can start index investing and move one step closer to millionaire status.

There are so many different investment apps that you can use to begin investing in index funds.

I’ve listed 2 that I’ve used personally, and find very user-friendly (and cost-effective), below.

Sneak Peek: Best Investing Apps for Index Funds


Best for Long-Term Investors: M1 Finance

Best for Beginner Investors: Acorns

Before we take even 1 step further, let’s take a look at what index funds actually are.

Below are some things to keep in mind when you invest in an index fund:

  • You will likely never outperform the index
  • You will likely match the performance of the index itself

Let’s take the S&P 500 index, for instance.

S&P 500
Index name
S&P 500
Number of Companies Tracked
500
Types of Companies Tracked
Largest US companies
How often is it updated?
Quarterly

Graphically, here’s how your money would be invested in an S&P 500 index fund:

the millennial money woman blog post "how your money is invested in the s&p 500"

Before we dive deeper into how to invest in index funds, let’s take a look at the pros and cons of index fund investing.

Pros and Cons of Index Fund Investing


As with anything in life, before you financially commit to something, make sure you review the pros and cons first.

Index Fund Pros Index Fund Cons
Very liquid
May have limited gains – based on your index fund choice
Low cost fees
Very unlikely to outperform the market
Long term growth
Less flexibility
High diversification
Limited exposure to a variety of different investment choices

For my personal situation, the pros far, far, far outweigh the cons.

That’s why I am investing 100% using the index fund investing strategy (I’m serious).

Now that you have a basic understanding of the pros and cons of index fund investing, let’s take a look at how to invest in index funds.

How to Invest in Index Funds

the millennial money woman blog post "how to invest in index funds 4-step guide"

Are you ready? 

Here’s my guide on how to invest in index funds (step-by-step)!

the millennial money woman blog post "how to invest in index funds step 1"

Step #1: Choose an Index


Index investing is my favorite investment strategy, and virtually anyone can do it for as little as $5 if you start with 
Acorns, for example.

You’re not just investing in:

  • 1 stock
  • 1 company

You’re investing in:

  • Many stocks
  • Many companies

And that means:

  • You’re diversified
  • Your risk is spread out
  • You could likely outperform hedge funds

Let’s take my favorite index fund, the S&P 500 index fund

As the name suggests, the index tracks 500 of the best and largest (blue chip) companies in the U.S.

So, if you invest in an S&P 500 index fund, you will own a tiny percentage of ALL of the companies within the S&P 500 index.

Take a look at this visual representation of the companies within the S&P 500.

finviz sp500

Source: Source: Finviz

Keep in mind that if you invested in the S&P 500 index fund, you would now be the proud owner of a tiny percentage of these companies.

When you are considering your index of choice, make sure you consider which company types your index of choice is investing in:

Index Category to Consider What it Means for You
Company size

Decide the type of company you prefer your index to invest in:

- Small
- Large
- Medium

Geographic location

Decide where you prefer to invest in:

- U.S.
- Global
- Combination

Industry sector

Decide which industry sector you prefer to invest in:

- Health
- Biotech
- Finance
- Technology

Asset type

Decide which asset type you prefer to invest in:

- Cash
- U.S. stocks
- Commodities
- Foreign bonds
- International Stocks

Market type

Decide the market type you prefer to invest in:

- Mid cap markets
- Blue chip markets
- Emerging markets
- Developed countries
- Developing countries

Remember, there are many other indices in addition to the S&P 500 index fund. Some of these indices include: 

  • S&P 500
  • FTSE 100
  • Russell 2000
  • MSCI World
  • Wilshire 5000
  • Nasdaq composite index
  • Dow Jones Industrial Average
  • Bloomberg Barclays US Aggregate Bond Index

Let me tell you – before I knew anything about investing, reading these names was just a bunch of gobbledygook. 

Aka I had no idea what I was reading. 

In the case you feel like you’re reading another language too, let me translate these previous indices into plain English below:

Index Name What it's Famous For Why You Should Invest in it
S&P 500 (Standard & Poor)
500 largest U.S. companies
  • If you’re new to investing

  • If you want to invest in stable, long-term growth companies
FTSE 100 (Financial Times Stock Exchange)
100 largest companies listed on the London Stock Exchange
  • If you want international exposure

  • If you want exposure in a leading European economy

Russell 2000

  • 2,000 companies

  • Smallest cap US companies
  • If you want to invest in small companies

  • If you want to invest in potentially riskier but higher growth potential companies

  • If you are not worried about the stability in value of these companies
MSCI World (Morgan Stanley Capital International)
  • International stock index

  • Represents the large and mid cap firms

  • 23 developed countries
  • If you want to invest internationally

  • If you want to invest in developed countries

Wilshire 5000

  • Broadest index of publicly traded US companies

  • 3,500 companies

  • Regarded as the most accurate measure of the overall US stock market
  • If you want to invest in the broadest index of the US economy
Nasdaq Composite Index
  • Measures US and international stocks

  • Tracks more than 3,300 stocks
    Includes the world’s top tech and biotech giants
  • If you want to invest in the largest global tech and biotech companies
Dow Jones Industrial Average
  • Blue-chip index

  • Heavily focused on industrial stocks such as General Electric, 3M and Caterpillar

  • Tracks 30 companies, which are also traded on the Nasdaq and and the S&P 500
  • If you are looking for a very narrow exposure to the largest industrial-type US companies
Bloomberg Barclays US Aggregate Bond Index
  • Measures the US bond market

  • The bond market traits include: fixed-rate, taxable, investment grade (high quality) bonds
  • If you don’t want to invest in the stock market

  • If you want to track a stable, high quality bond market index

  • If you are not looking for the highest risk/return profile

Typically speaking, the skilled investor will consider investing in other indices in addition to the S&P 500 to increase their diversification. 

If you are looking to receive more tailored investment advice, I’d suggest you check out The Motley Fool, which offers excellent investment tips from the pros.

If you have a bit more investing experience on your side and know what to search for (such as expense ratios, market capitalization, etc.), I’d suggest to check out Morningstar, which investors on Wall Street also often use.

Remember, if you’re invested in just the S&P 500, you are only invested in:

  • U.S. companies
  • The largest, more stable companies 
  • Typically a higher technology sector exposure

Think back to our Index Fund Investing Pro and Con list – remember how one of the cons mentioned less diversification? 

With the S&P 500, you are invested in the 500 largest U.S. companies, which among other things, means:

  • You don’t have international exposure
  • You don’t have exposure in the small, up and coming firms (meaning higher risk, but also higher reward)
  • Because the largest S&P 500 firms (Apple, Facebook, Google, Tesla, etc.) are tech firms, you have a high concentration in the technology sector

Generally speaking, however, the S&P 500 still is one of the best indices to track, and I will continue to remain firmly invested in the S&P 500.

the millennial money woman blog post "how to invest in index funds step 2"

Step #2: Decide which Index Fund to Invest


Now that you’ve decided which index you’re willing to invest in, it’s time to select an index fund for you to actually buy. 

As you know, my No. 1 index fund choice for any type of investor is the S&P 500. 

There are many, many different companies that offer S&P 500 index funds. 

Some of these companies include:

  • Fidelity
  • Vanguard
  • Charles Schwab

The S&P 500 index funds offered by these companies do the same thing: They track the S&P 500. 

However, the way each company structures their S&P 500 index fund is a little different. 

I like to think about index fund investing like Vanilla ice cream:

It’s supposed to be the same flavor – and it is – but depending on the company you go to; you may taste some minor differences. 

That’s the same with index fund investing – although all S&P 500 index funds are investing in the same 500 companies – the flavors are a little different. 

Below are some things to keep in mind before you select your index funds:

Things to Consider before Investing in an Index Fund What it Means
Minimum Required Investment

Some index funds may only permit you to invest in them if you have a minimum investment.

Investment Account Minimum

Some accounts may not allow you to invest until you have a certain amount of cash.

Expense Ratio

Determines how much you’re paying the index fund managers.

Tax Considertations

Depends on the type of investment vehicle you are using to do your index fund investing.

To determine expense ratios and other, more advanced investment metrics, I use Morningstar, which even my investment manager friends use to manage their $1 billion book of business.

If you’re interested to invest in the S&P 500 and are looking for different index fund choices, I’ve listed a few of my favorites, below.

Index Fund Name Ticker Symbol Expense Ratio
Vanguard 500 Index Fund – Admiral Shares**
VFIAX
0.040%
SPDR S&P 500 ETF
SPY
0.095%
iShares Core S&P 500
IVV
0.030%
Vanguard 500 Index Fund
VOO
0.030%
Fidelity 500 Index Fund
FXAIX
0.015%
Schwab S&P Index Fund
SWPPX
0.020%

**Keep in mind that the minimum investment for the VFIAX index fund is $3,000.

There’s no right or wrong answer when you’re wondering, “which S&P 500 index fund should I invest in?”

Typically speaking, you’ll want to aim for the lowest cost index fund (the one with the lowest expense ratio). 

The lower your expense ratio, the more money you’ll have in your pocket – and the higher the chances that you’ll become a millionaire earlier.

the millennial money woman blog post "how to invest in index funds step 3"

Step #3: Decide where to Buy your Index Fund


Now it’s time to decide where to buy your index fund. 

This means, you’re deciding which investment account you will use to start your index investing journey. 

Some of these platforms include:

Each investment platform comes with its pros and cons, so make sure you review the full picture before you financially commit. 

Generally speaking, Acorns and M1 Finance are for the investor who loves visual data and wants some investment guidance and help along the way. 

When you are deciding where to buy your index funds, consider some of the following:

Considerations on where to buy your index fund What it Means

Simplicity

Is it easy for you to invest in index funds?

Trading Fees

Sometimes, you may be paying more than $20 per trade to invest in index funds.

Fund Type

Some investment platforms only offer mutual index funds, while others only offer ETF index funds.

Investment Vehicle

Depending on your investment vehicle you may be restricted by which index funds you can invest in.

Now, if you’re looking for the best index investing application and still want some investing guidance – and who wouldn’t – I’d suggest to check out my 2 favorite options, below.

Option #1: M1 Finance

M1 Finance gives the investing experience a whole new meaning:

  • It’s easy
  • It’s hands-off
  • It’s automatic
  • It’s stress-free

With M1 Finance, you can invest in an S&P 500 index fund portfolio, for minimal costs and receive a broad exposure to the market.

Option #2: Acorns

Acorns is a fantastic investment app for those who are just starting out in their investment journey and don’t necessarily have $100’s to save and invest.

With Acorns, all you need is $5 to start investing in your chosen index funds.

To offer a little more insight into these top 2 investment platforms, take a look at my comparison chart below.

M1 Finance Acorns

Fees

$0

$1 - $5 per month

Commissions

$0

$0

Minimum Investment

$100

$5

Mobile App Features

Yes

Yes

Fund Types

- ETFs
- Stocks
- Pre-Designed Portfolios

- ETFs
- Pre-designed portfolios

Account Types

- Trust
- SEP IRA
- Roth IRA
- Rollover IRA
- Joint Account
- Traditional IRA
- Custodial account
- Individual Taxable

- SEP IRA
- Roth IRA
- Traditional IRA
- Individual Taxable

Individual Stocks

Yes

No

Fractional Share Investing

Yes

Yes

Round-Up Investing

No

Yes

Automatic Rebalancing

Yes

Yes

Customization

Yes

Limited to 5 Portfolios

S&P 500 Index Fund & Pie Options

- SPY
- VOO
- SPYD
- SPYV
- Vanguard Pie

- VOO

Best For

- Experienced investors
- Fee conscious investors
- Investors who like individual stocks

- Beginner investors
- Forgetful investors
- Investors who need help saving

Of course, take some time to consider all of your options. 

Honestly, even if you’re an advanced investor, it could make sense to at minimum check out M1 Finance and Acorns – mainly because of the low fees, which is in part, why I am such a big fan.

the millennial money woman blog post "how to invest in index funds step 4"

Step #4: Determine your Index Fund Investment Type


Now it’s time to think about what type of index fund you want to invest in – whether you want to invest in a mutual fund or if you want to invest in an ETF. 

I’m going to be very honest with you here:

As long as your expense ratios are low, it generally doesn’t matter whether you invest in an index mutual fund or in an index ETF fund

Here’s when your index fund investment type does matter:

If you’re investing in:

  • HSA
  • 401k
  • 403b
  • Other employer-sponsored plans

Chances are, your investment options may be restricted to whatever your employer allows you to invest in.

For example, my HSA account only allows me to invest in mutual funds, not ETFs or individual stocks.

Mutual Fund vs ETF


To provide some clarity, check out the differences between ETFs and mutual funds, below.

Now let’s take a look at what an ETF is.

And that’s the main difference between ETFs and Mutual Funds: 

ETFs trade like stocks, while mutual funds trade at the end of each day, regardless of when you buy or sell your mutual fund. 

Take a look at some additional comparisons between these 2 index investment funds below.

Mutual Fund ETF
Lower investment minimums
No - Most have higher minimums ($3,000+) to begin investing

Yes

Cost Efficiency

No - Typically higher rates since mutual funds are actively managed.

Yes - Typically passively managed funds

Tax Efficiency

Typically No

Typically Yes

Liquidity

Typically lower liquidity

Typically higher liquidity

You prefer control over trade price
No - Mutual funds trade at the end of the day, at the same price, regardless of when you buy/sell
Yes - ETFs offer real-time pricing, price fluctuations and they trade when you buy-sell
You prefer to set-up automatic transactions
Yes - It’s very easy to set up automatic investment plans and/or withdrawals from your mutual fund
No - It’s typically much harder to set-up automatic investment plans and/or withdrawals from your ETF
Index Fund Options

Yes

Yes

To provide you with a more visual-friendly depiction, check out my mutual funds vs ETFs infographic below.

the millennial money woman blog post infographic "mutual funds vs etfs"

It’s good to know the difference between mutual funds and ETFs, but like I said before, it’s my humble opinion, it really shouldn’t matter whether you invest in an S&P 500 mutual fund versus an S&P 500 ETF – as long as the expense ratios are low.

index investing pro tips

Index Investing Pro Tips


As you begin investing in index funds, there are a few things you should keep in mind. 

Pro Tips to Keep in Mind:

  • Expense ratio
  • Long Term mindset
  • Dollar cost averaging
  • Monitoring the fund’s performance
  • How would you invest in a Roth IRA?
  • Does your budget allow for you to invest more?

Allow me to explain a little further in-depth.

Pro Tip Explanation

Expense Ratio

The lower the expense ratio, the lower the cost to you.

Long Term Mindset

It will take time and you’ll likely see your money go up and down with the stock market fluctuations.

Dollar Cost Averaging
Dollar Cost Averaging (aka DCA) is a surefire way to grow your investments over period investments, over time.
Monitor the Fund’s Performance

Your index fund should ultimately be mirroring the performance of your chosen index.

How would Invest in a Roth IRA?

Since Roth IRAs are tax-advantaged, they may be a great investment vehicle if you want to take out money a few decades from now.

Does your Budget Allow you to Invest more?
Understand your budget to determine whether you could be investing more toward your index funds.

Becoming an index fund millionaire is very possible if you:

Investing with index funds will not be an overnight success story. 

It will take time and patience, but that will pay off in the end.

Some S&P 500 index fund favorites include:

Index Fund Name Ticker Symbol ETF or Mutual Fund Expense Ratio
Vanguard 500 Index Fund – Admiral Shares**
VFIAX
Mutual Fund
0.040%
Vanguard 500 Index Fund
VOO
ETF
0.030%
Fidelity 500 Index Fund
FXAIX
Mutual Fund
0.015%
Schwab S&P Index Fund
SWPPX
Mutual Fund
0.020%

**Keep in mind that the minimum investment for the VFIAX index fund is $3,000.

As you can see, all of these funds are exceptional index fund options, all with a low expense ratio (meaning less money out of your pocket) and all tracking the S&P 500 index, one of the most diverse and stable indices over almost the past 100 years.

Closing Thoughts


If you’re looking to potentially outperform Wall Street managers while only paying minimal fees (small expense ratios), then index fund investing the right thing for you.

the millennial money woman blog post "index funds performance statistics"

Image: The Millennial Money Woman | Source: AEI

Yikes, that’s not good news for a fund manager. 

And although fund managers (aka professionals who have likely gone to Ivy League schools and charge very, very high fees) may outperform passively managed index funds in the short term – we are in it for the long run… and for low fees. 

Also – might I remind you that if one of the wealthiest people in the world – Warren Buffet – advocates for index fund investing, then what are you still waiting for?

Personally speaking, index investing is something that I do every single day – and have seen multi-millionaire clients do as well.

In the end, I love how easy it is to invest in index funds.

If you’re an experienced investor, then I’d say Vanguard or Charles Schwab could be the right platforms for you. 

If you prefer some investing guidance along the way, then M1 Finance or Acorns  may be good options to begin index fund investing.

Plus, if hedge fund managers can’t beat the market, why should I be able to beat the market if I pick stocks?

Guys and Gals – now you know the secret sauce to investing in index funds. 

Start today, because your bank accounts will thank me tomorrow.

Which index fund do you plan to invest in?

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Fiona Smith
Fiona Smith
The Millennial Money Woman was founded by Fiona Smith. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy to young professionals.

12 thoughts on “How to Invest in Index Funds [New Step-by-Step Guide 2021]”

  1. I’ve heard of M1 finance all the time but I haven’t really dived into learning what the platform was or anything. It’s something that I hope to check out soon.

    Index investing truly is the best wealth creation vehicle, isn’t it? Just buy and hold and watch as the money rolls in after 3-4 years.

    1. David,

      I couldn’t agree more with you – index investing certainly is one of the easiest, simplest, and most cost-efficient ways to build and maintain your wealth. It’s not an overnight strategy though, so if you’re not a patient person, it may be difficult (but well worth the wait!). M1 Finance is a great investing platform in my opinion – I downloaded the app on my phone within minutes and it’s pretty straightforward when it comes to setting up your account. I think M1 Finance is a great tool to have in your arsenal.

      Thanks for your sharing your thoughts and good luck on your journey!

      Cheers,

      Fiona

        1. David,

          Sounds like you’re on the path to accomplish your goals! Time management and prioritizing those tasks that will help you move one step closer to your ultimate goals, which certainly is a life hack. Good luck on your journey!

          Cheers,

          Fiona

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