Index funds are the single most recommended investment for beginners — and for good reason. They’re simple, low-cost, and over long periods they outperform the vast majority of professional investors. Here’s everything you need to know to actually start.
What is an index fund?
An index fund is a type of investment that tracks a market index — a list of companies. The most common is the S&P 500, which tracks the 500 largest companies in the US: Apple, Microsoft, Amazon, Google, and 496 others.
When you buy an S&P 500 index fund, you’re buying a tiny piece of all 500 of those companies at once. If the US stock market goes up, your investment goes up. If it goes down, your investment goes down.
The key advantages: instant diversification (you own 500 companies, not just one), very low fees, and no need to pick individual stocks or time the market.
Why index funds beat most active investing
There are two ways to invest in stocks: actively (paying someone to pick stocks for you) or passively (buying an index fund and holding it).
Over a 15-year period, around 90% of actively managed funds underperform their benchmark index. Professional fund managers with teams of analysts and decades of experience consistently fail to beat the market average. Index funds just are the market average — which turns out to be better than almost everyone else.
This isn’t an opinion. It’s measured data, tracked annually by Standard & Poor’s.
The fees that quietly destroy returns
Every fund charges an annual fee called an expense ratio. It sounds small but compounds significantly over time.
- Active fund: typically 0.5–1.5% per year
- Index fund: typically 0.03–0.20% per year
On $10,000 invested over 30 years at 7% growth, the difference between a 1% and 0.03% expense ratio is approximately $30,000 in fees. The index fund investor keeps that $30,000.
The best index funds to start with
- Vanguard Total Stock Market ETF (VTI). Covers the entire US stock market — over 4,000 companies. Expense ratio: 0.03%. One of the most recommended investments in personal finance.
- Fidelity ZERO Total Market Index (FZROX). Zero expense ratio. Covers the whole US market. Only available at Fidelity.
- iShares Core S&P 500 ETF (IVV). Tracks the S&P 500. Expense ratio: 0.03%.
- Vanguard S&P 500 ETF (VOO). Another S&P 500 tracker. Widely held, very low fees.
You don’t need all of these. Pick one and start. VTI or VOO are the most common starting points.
Where to buy index funds
You buy index funds through a brokerage account. The best options for beginners:
- Fidelity. No account minimums, excellent tools, zero-fee index funds available, great for beginners.
- Vanguard. The original index fund company. No minimums for ETFs, long-term focused, slightly less beginner-friendly interface.
- Charles Schwab. No minimums, good app, solid customer service.
Open a Roth IRA through one of these brokerages if you’re investing for retirement — your gains grow completely tax-free. If you’ve already maxed your Roth IRA contribution ($7,000/year in 2025), open a regular taxable brokerage account.
How to actually buy your first index fund
- Open a Fidelity or Schwab account online (takes about 10 minutes)
- Transfer money from your bank account (takes 1–3 business days)
- Search for the fund by ticker symbol (e.g., VTI or FZROX)
- Enter how much you want to invest and confirm the purchase
That’s it. You now own a piece of hundreds of American companies.
The one rule that matters most
Don’t sell when the market drops. Markets go down — sometimes a lot. In 2020 the S&P 500 dropped 34% in five weeks. By the end of the year it was at an all-time high. The people who sold in March 2020 locked in losses. The people who held (or bought more) made significant gains.
Index fund investing works over long time horizons. The strategy is: buy, hold, add more over time, and don’t panic. That’s genuinely all there is to it.