How to Invest in Index Funds: A Beginner's Guide

Warren Buffett has publicly said that most people should just buy index funds and hold them. Over the last 20 years, more than 90% of actively managed funds have underperformed simple S&P 500 index funds — after fees. Here's how to get started.

What Is an Index Fund?

An index fund is a basket of stocks designed to match a market index like the S&P 500 (the 500 largest US companies). When you buy one share of VOO (Vanguard S&P 500), you instantly own a tiny piece of Apple, Microsoft, Amazon, and 497 other companies. Instant diversification.

Index Funds vs Actively Managed Funds

• Index fund fees: 0.03–0.20% per year
• Actively managed fund fees: 0.5–1.5% per year
• On $100,000 over 30 years, the fee difference alone costs $60,000+
• And most active funds still underperform the index

The Best Index Funds to Start With

• VTI (Vanguard Total Stock Market) — owns every US stock, 0.03% fee
• VOO (Vanguard S&P 500) — tracks the 500 largest US companies, 0.03% fee
• FSKAX (Fidelity Total Market) — similar to VTI, 0.015% fee
• VXUS (Vanguard Total International) — adds international diversification
• BND (Vanguard Total Bond Market) — for stability as you approach retirement

Step-by-Step: How to Buy Your First Index Fund

1. 1Open a brokerage account — Fidelity, Vanguard, or Schwab are all excellent
2. 2Fund the account with a bank transfer
3. 3Search for the fund (e.g., VTI or FSKAX)
4. 4Enter the dollar amount you want to invest
5. 5Click buy — you're done

The Lazy Portfolio That Beats 90% of Investors

Buy one total market index fund (VTI or FSKAX). Contribute every month automatically. Never sell during crashes. Rebalance once a year. That's it. This simple strategy has beaten most professional money managers over every 20-year period.