How To Invest in Index Funds: A Simple Step By Step Guide

If only more things in life were life index funds… cheap, easy and generally work better than the flashy, high-priced options.

For long term retirement savings, we’d argue there is no better place for your money than an index fund. To find out why, you can read our article here about the spectacularly boring effectiveness of index funds.

This article, however, is all about how to invest in index funds. As you’ll see shortly, you don’t need to be a rocket scientist (or a braniac of any kind quite frankly) to do this well. We’ll walk you through the process step by step…

Step 1: Open a brokerage/retirement account

You can’t buy index funds just anywhere. You have to have an account with a brokerage firm.

It can be a retirement account. Or it can be a plain ol’ brokerage account. Doesn’t matter.

Based on personal experience, I’d recommend you either open up and account with Fidelity or Vanguard. They offer good selection. Good customer service. And plenty of index fund options.

Oh, and as a bonus, they keep their fees super low too!

Step 2: Pick Your Index Fund(s)

You can make this step drop dead simple. Or you can make it so it requires a few more brain cells. There’s no right or wrong here.

If you’ve got a long way before you are gonna need your money and just want to put it in the stock market, then buy an S&P500 index fund. The Vanguard 500 Index Fund (VFINX) or the Fidelity 500 Index Fund (FXAIX) are excellent choices here.

If you have a shorter time frame until retirement, you might not want to put all your money in the stock market. In this case, you can buy a bond index fund which will have less risk. Both Vanguard and Fidelity have plenty of low cost bond index funds to choose from.

If you want to get fancy, you can divide your money up even more. You can put 50% in an S&P fund, 25% in an International index fund and 25% in a bond index fund.

There’s really no limit to how to slice and dice things. We’d recommend you not go too crazy. Pick 2-4 index funds at the most. Only buy more than that if you know what you’re doing.

Step 3: Place Your Order

Once you pick out your fund(s). It’s time to place your order. Which is super simple.

First, you find the symbol of the index fund(s) you wanna buy. These are typically 5 letters like our examples above – VFINX and FXAIX.

Then you log into your brokerage account and go to the page where you can place your order. Next you enter the symbol, select that you want to buy shares and then enter the dollar amount you want to invest in the fund.

Usually you’ll get a chance to preview the order and, finally, you click the “Place Order” or “Buy” button and you’re done.

One thing to know here… orders for index funds are only processed once per day. This happens right after the market closes around 4PM.

So if you place your order at night, keep in mind you will not officially own shares of the fund until around 4PM Eastern the next day.

Step 4: That’s It!

That’s really all there is to it. If you invest on a regular basis, you might have to repeat Step 3 each month. But it’s not a big deal. And you can even set things up so it happens automatically.

In any case, it really is simple to invest in index funds. And they’re a great investing option.

So if you’re interested in them, use the steps above and jump on in.