COMPASS FINANCIAL SERVICES

What is an Index Fund?

Quite simply, instead of investing in a few select stocks, an index fund invests across the board in a particular index, such as the Wilshire 5000, NASDAQ or S&P 500. The amount of money invested in any one stock is determined by its market capitalization (or market cap) and the market cap of the other companies in the index.

In contrast, a managed mutual fund attempts to choose companies whose stock prices will rise, and get rid of companies whose stock prices will fall.

Yet statistics indicate that no mutual fund manager or brokerage can consistently outperform--or "beat"--the market.  What's more, experts have scrutinized years of market data only to conclude that, on average, brokerage and managed mutual fund returns have consistently fallen short of the market, after their administrative expenses are factored in.

The Nobel Prize-winning theory behind index funds--backed by countless years of experience and effort by investors--shows the following: consistently achieving the level of returns that the market achieves will yield greater returns than managed mutual funds and brokerages will yield, over the long run.

The best way to achieve the market's level of returns is to invest in index funds while simultaneously controlling your investment expenses. No single index represents the entire market, so it is necessary to invest in several index funds using the appropriate asset allocation.