How to Build an Index Fund Portfolio

by Cynthia Myers

A stock index fund is composed of a group of funds. The fund may be composed entirely of small business stocks, utility stocks, or another class of stocks. Rather than looking at the ups and downs of disparate individual stocks, index funds try to average risk by looking at a group of funds. Some of the funds in the index may gain on a given day while others lose, but the aim is to build an index that will rise in value over time. Investing in index funds is one way to meet your investing goals.

1. Determine your investment goals. Even when investing in stock indexes, you need to decide whether you're aiming for steady growth, stability or a faster return on investment. You can find index funds that aim to deliver any of these goals.

2. Research funds. Familiarize yourself with the historic returns of various funds, as well as which funds are no-load funds and which charge loads, or annual fees.

3. Choose asset allocation ratios. Rather than invest in a single type of fund, most financial advisors suggest you diversify by investing in large-cap, small-cap, foreign funds and bond funds. If you have special interests, such as socially responsible or "green" investing, you can find funds that specialize in stocks from these kinds of companies.

4. Open an account with a legitimate brokerage. You can research companies online to see what kinds of index funds they offer, then choose one that offers the mix of funds that appeals to you. Most of these organizations offer free investment guidance to account holders, so don't be afraid to ask questions and seek advice.

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