Index Funds for Beginners: The Lazy Way to Build Wealth

Investing sounds complicated. There’s a whole industry dedicated to making it sound that way — because complexity justifies fees. But for most people, the best investment strategy is also the simplest: buy index funds and hold them.

Warren Buffett has said as much. Most research on investing performance supports it. Here’s why it works and how to start.

What Is an Index Fund?

An index fund is a type of investment fund that tracks a market index — a pre-defined list of companies. The most famous index is the S&P 500, which contains 500 of the largest publicly traded companies in the United States: Apple, Microsoft, Amazon, Google, and 496 others.

When you buy shares in an S&P 500 index fund, you’re buying a tiny piece of all 500 companies at once. When those companies collectively grow in value, your investment grows too.

The key point: nobody is making active decisions about which stocks to buy or sell. The fund just mirrors the index. This is called passive investing.

Why Index Funds Beat Most Active Investing

Every year, financial research firm SPIVA publishes data comparing actively managed funds (where a team of professional analysts pick stocks) to their benchmark indexes. The results are consistent and humbling for the professionals: over a 15-year period, roughly 90% of actively managed funds underperform their benchmark index.

That means a manager being paid a lot to pick stocks almost certainly does worse than a fund that just buys everything.

Why? A few reasons:

• Active funds charge higher fees, which compound against returns over time
• Markets are generally efficient — information is priced in quickly, making it hard to consistently find undervalued stocks
• Even the best analysts are wrong often enough to drag down overall performance

Index funds charge tiny fees (often 0.03%–0.10%) because there’s no research team to pay. That cost difference compounds massively over decades.

The Math of Fees

Say you invest $10,000 and earn 7% annually over 30 years.

• With a 0.05% fee (typical index fund): ~$73,400
• With a 1.0% fee (typical active fund): ~$57,400

The only difference is the fee. A 1% fee, compounded over 30 years, costs you nearly $16,000 on a $10,000 investment. On larger balances or longer timeframes, the gap is enormous.

Types of Index Funds

Mutual funds — Priced once per day after market close. You buy at the day’s end price. Some have minimum investments ($1,000+), though many brokerages now offer no-minimum options.

ETFs (Exchange-Traded Funds) — Trade like stocks, priced throughout the day. Usually no minimum — you can buy one share at a time. Sometimes slightly more tax-efficient than mutual funds.

For most beginners, the difference barely matters. Either works. Choose based on what your brokerage makes easiest.

Which Index Fund Should You Buy?

There are three main categories:

Total US Stock Market — Covers virtually all publicly traded US companies (3,000–4,000 companies). Slightly more diversified than S&P 500.

• Fidelity: FSKAX (0.015% expense ratio — essentially free)
• Vanguard: VTSAX (0.04%)
• ETF version: VTI (Vanguard Total Stock Market ETF)

S&P 500 — 500 largest US companies. Very similar performance to total market over time.

• Fidelity: FXAIX (0.015%)
• Vanguard: VFIAX (0.04%)
• ETF version: VOO or SPY

Total World Stock Market — US plus international markets. More diversification, slightly lower historical returns than US-only (but this can reverse).

• Vanguard: VTWAX or VT (ETF)

For a simple starting portfolio, pick one of the above and go. Many people just buy a total US market or S&P 500 fund and call it a day. Adding an international fund for more diversification is smart but not mandatory.

Target-Date Funds: Even Simpler

If you don’t want to think about it at all, target-date funds are the ultimate lazy option. You pick a fund based on your expected retirement year (e.g., “Target Date 2055”), and it automatically holds a mix of stocks and bonds that gradually gets more conservative as you approach retirement.

• Fidelity Freedom Index 2055 (FDEWX) — 0.12% fee
• Vanguard Target Retirement 2055 (VFFVX) — 0.08% fee

One fund. Set it. Done.

Where to Open an Account

You need a brokerage account to buy index funds. Best options for beginners:

Fidelity — No minimums, excellent zero-fee index funds, great interface. Hard to beat.

Vanguard — Pioneer of index investing, excellent funds, slightly clunkier interface.

Charles Schwab — No minimums, good fund selection, great customer service.

All three are legitimate, established institutions. Pick one and open either a Roth IRA (if you’re eligible — see our Roth IRA guide) or a regular brokerage account.

How to Actually Buy an Index Fund

1. Open and fund your account (transfer money from your bank)
2. Navigate to “trade” or “buy”
3. Enter the fund ticker symbol (e.g., FSKAX)
4. Enter the dollar amount you want to invest
5. Confirm and execute

That’s it. You now own a piece of hundreds of companies.

How Often Should You Buy?

The best approach for most people is dollar-cost averaging: invest a fixed amount on a regular schedule, regardless of what the market is doing. Most brokerages let you automate this.

Investing $200/month consistently beats trying to time the market. You’ll buy more shares when prices are low and fewer when they’re high — which is actually good.

What to Do When the Market Crashes

This is the hardest part. Markets drop. Sometimes by 20%, 30%, or more. When that happens, every instinct tells you to sell and stop the bleeding.

Don’t.

Selling during a downturn locks in your losses. History shows that markets recover. The people who stayed invested during the 2008 crash and the 2020 COVID crash came out ahead. The people who sold locked in losses and often missed the recovery.

The most important thing you can do when markets crash: nothing. Keep your regular contributions going. Buy the dip if you can. But above all, don’t sell.

A Realistic Return Expectation

The US stock market has returned roughly 10% per year on average historically, or about 7% after inflation. This is not guaranteed — past performance doesn’t promise future results. There will be bad years, bad decades even. But over long time horizons (20+ years), the historical trend has been consistently upward.

$500/month invested at 7% average annual return:

• After 10 years: ~$86,000
• After 20 years: ~$261,000
• After 30 years: ~$606,000

Consistent, boring, automatic investing. That’s how wealth is built for regular people.

The Bottom Line

You don’t need to be smart about investing. You need to be consistent. Index funds let you own the whole market at minimal cost, without picking stocks or timing trades. Over decades, this approach outperforms the vast majority of professional investors.

Open an account. Buy a total market or S&P 500 index fund. Set up automatic contributions. Then mostly ignore it.

If you want an even more hands-off approach, apps like Acorns automatically round up your everyday purchases and invest the spare change — a painless way to start building the habit while you get comfortable with the bigger picture. For tracking how your growing portfolio fits into your overall net worth, Empower offers a free dashboard that pulls all your accounts together in one place.

That’s the whole strategy. And it works.

## Related Reads

• Roth IRA Explained — open a Roth IRA to hold your index funds tax-free; one of the best moves you can make
• Roth IRA vs Traditional IRA: Which Should You Pick? — once you’re investing in index funds, this helps you choose the right account
• What Is Compound Interest? — the math that makes consistent index fund investing so powerful over decades

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