401k Investing: How to Build an All-Index Fund

Focusing on an all-index fund strategy for 401k investing is a smart approach that will pay off over the long haul. As any experienced investor will tell you, diversification is often the common denominator in successful portfolios. That’s why it pays to invest over a wide range of indexes.

Common Major Indexes

Understanding the wide variety of indexes is the first step in building an all-index fund through 401k investing. The Dow Jones Industrial is one index comprised of 30 blue chip stocks, while the S&P 500 covers a broader sector of stocks. Others, such as the Wilshire 5000, are comprised of all the publicly traded American stocks. Almost all of these indexes contain some of the most recognizable companies, from General Electric to Tupperware.

Investing in Indexes

One of the quickest and easiest ways to build an all-index fund is through exchange-traded funds. Spiders (AMEX: SPY) and iShares (AMEX: IVV) are two of the more common funds that track the S&P 500, while Vipers (AMEX: VTI) track the Wilshire 5000 index. All exchange-traded funds can be bought and sold on the American Stock Exchange.

The other way to build an all-index fund through 401k investing is through mutual funds. Index-focused mutual funds will often have multiple positions in a variety of indexes to help build diversification. Recent studies have shown, however, that the return on investment varies little between mutual funds and exchange-traded funds.

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