There are a LOT of terms in investing that can be incredibly confusing. And when you hear terms thrown around, you FEEL like you should know what they all mean. But no one explains these things to us back in school. So we feel intimidated, which causes paralysis – and we never get started. That’s why I hope to be a voice to help stop shaming people for not knowing about investing (I was there too, not so long ago!) – and to help you not feel like you SHOULD already know these things. You aren’t stupid and shouldn’t think of yourself as such when no one has broken these things down into digestible bites.
So to the question. An index fund is like a mutual fund in many ways. It’s buying a group of shares of stocks of many or all of the best companies in the U.S. or the world. All those companies compete with each other, so they keep providing more and more profits. And what’s great is you and I actually get a tiny sliver of that company’s profits. But that “tiny sliver” of their money can turn into a substantial amount of money for us, over time. And what’s great about index funds is they also protect you from one company doing really poorly and you losing a huge chunk of your money.
The “target date” is simply a designation that a portfolio will “mature” at a specified date (near your retirement). This means that when you start, you will have higher risk stocks that also can provide a higher return. As you age, the portfolio automatically shifts for you to have less risky items (like bonds) which make lower returns, but have lower risk. In the past, a manager had to do this all for you and charged big fees to do so. Now, with just a bit of education, you can pay a company like Vanguard or Fidelity .08% instead of a financial manager 1% (about 16X the cost). That doesn’t sound like much, but it’s a LOT of money over time.
I’ll share in another post how to pick your target date index fund.
But for now, remember, investing takes two things: 1) time and 2) consistency.
It isn’t as exciting as GameStop stock, but it works.