What is an Index Fund?

June 20, 2024

Welcome to the first edition of the newsletter! Today, we're going to start with a simple area you've heard all about one too many times: index funds. But, like most people, many could not explain what they do. Fear not. Unlike many other investment choices, if you don't have that much knowledge on index funds, it won't make or break you. That's the beauty of it: it takes the heavy lifting from your hands.

Let's max out your financial knowledge!

What is an Index Fund?

It's a fund designed to mirror a specific benchmark. Sometimes I call this the "monkey see, monkey do" fund. Unlike a traditional mutual fund, its intent is not to beat a specific benchmark but simply copy it. Now, why is that special? They are simply practical for most investors.

There are four areas they shouldn't overlook:

→ Diversification

Because these funds are essentially a basket of multiple securities, you spread out the risk by not overconcentrating into one individual stock or bond.

→ Costs

Since it merely mirrors an index, there isn't much work to do behind the scenes with less management or trading. Therefore, it has a low expense ratio, which is an annual fee to cover the fund's costs. As your portfolio increases, these costs make a massive difference!

→ Tax Efficiency

Fewer tax transactions are being created because there is less change happening inside fund (low turnover ratio). As a result, it's viewed as more tax-efficient than a standard mutual fund.

→ Performance

Many active fund managers have underperformed their benchmarks over the last 20 years. As it turns out, it's incredibly difficult to beat it, even for portfolio managers! The performance of an index fund is not contingent on how good you are at beating the market but on how long you are willing to spend time in it. It doesn't try to beat the index; it simply mirrors it.

Overall, while everyone's situation is different, and many investment choices should be considered, index funds are an excellent choice for average investors looking for a practical way to build wealth.

Index and chill.

Like a financial sounding board for life's biggest decisions.

You know how to make money, but you're not sure if you're making the right moves financially. That's why I started Pashman Financial.

max pashman

PASHMAN FINANCIAL, LLC (“Pashman Financial”) is a registered investment advisor offering advisory services in California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Pashman Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of Pashman Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.