Index Investing

Index investing is a passive investment strategy designed to match the performance of a specific market index by holding all (or a representative sample) of the securities in that index.

Core Concept: Instead of trying to beat the market, index investors accept market returns while minimizing costs.

Popular Indexes:

Index	What It Tracks	Example Fund
S&P 500	500 large US stocks	VOO, SPY, IVV
Total Market	All US stocks	VTI, ITOT
International	Non-US stocks	VXUS, IXUS
Bond Market	US bonds	BND, AGG
Total World	Global stocks	VT

Why Index Investing Works:

1. Cost Efficiency:

   • Expense ratios: 0.03-0.20%
   • vs. active funds: 0.50-1.50%
   • Savings compound significantly

2. Most Active Managers Underperform:

   • 90%+ fail to beat index over 15 years
   • After fees, underperformance worsens
   • SPIVA research confirms annually

3. Diversification:

   • Instant broad exposure
   • No single-stock risk
   • Market-cap weighted automatically

John Bogle's Legacy: Vanguard founder created first index fund in 1975. Initially mocked as "Bogle's Folly," it revolutionized investing.

Index Fund Types:

• Mutual Funds: Traditional, NAV pricing
• ETFs: Trade like stocks, intraday pricing
• Both serve similar purpose

Building an Index Portfolio: Simple 3-fund portfolio:

• US Total Market (50-60%)
• International (20-30%)
• Bonds (20-30%)

Limitations:

• Guaranteed average returns (never outperform)
• Market-cap weighting may overweight expensive stocks
• No downside protection