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How to Know if You Should Invest in Index Funds on Robinhood

An index fund consists of a mutual fund or an exchange-traded fund (ETF) and represents a diversified investment portfolio matching an underlying index.  However, numerous types of index funds exist and can invest in any number of industries or sectors as well as use various investing strategies (e.g., using margin loans to leverage returns).

Moreover, index funds present a collection of assets created by a fund manager or by another company, such as a brokerage or investment fund.

They have gained in popularity in recent years because index funds diversify your portfolio affordably by investing in many assets simultaneously. By investing into multiple assets with one index fund, they minimize the risk of having exposure to only one underlying asset.

With the proliferation of free stock trading apps like Robinhood and Webull which enable free ETF trades and offer different types of investment accounts, as well as major firms like Vanguard and Fidelity offering free trades on their no-fee branded index funds, investing in index funds has only become more accessible and cost-effective for retail investors. 

They’ve quickly become some of the best investments for young adults.

To keep markets honest, because index funds track an underlying index of stocks, bonds, commodities or other assets, they generally operate as an arbitrage mechanism. 

They do this by design by trading close to their net asset values, or the market value of an index fund’s assets less its liabilities, divided by the number of issued shares.

Because the overall market, and popular indexes, such as the S&P 500 and NASDAQ, provide consistent performance in the long run, professionals tend to recommend having index funds serve as a significant store of your investment portfolio.

Even renowned investor Warren Buffett suggests buying a low-cost index fund and holding it for long periods of time to see how to build wealth.  Buffett specifically recommends buying a S&P 500 index fund. 

At this point, you might be asking yourself, “Should I invest in index funds?” or “How can I invest in index funds?” Keep reading to learn if index funds are the right choice for you as well as how to invest in index funds on Robinhood.

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How to Know if You Should Invest in Index Funds


Some investors have a goal to “beat the market” and actively work to generate portfolio returns that outperform the stock market index of choice.

By investing in index funds, or securities which invest in a portfolio of underlying securities which comprise the same weightings used to calculate the index, you cannot beat your benchmark.

If you do the same thing as the market, how can you ever beat the market?  Instead, for the investors who wish to outperform their market benchmark, they need more flexibility to react to price fluctuations to the securities in the index.

They can do so by investing in individual stocks as opposed to a market index.  

Investors who prize this flexibility also likely do not care for the fees some index funds require. With services like Robinhood and Webull, you do not confront trading commissions and therefore no administrative expenses for the stocks in your portfolio. 

robinhood

If you want to be very active in your investing and want to try to beat the market, index funds might not be the best fit for you.  In this investing preference, you might consider growth stocks, value stocks, or penny stocks on Robinhood and Webull.

If that sounds tedious and fraught with risk, the common motto of, “if you can’t beat them, join them” likely describes your investing philosophy. 

Under this style of investing, often called passive investing, investors believe stock prices largely reflect accurate valuations and feel safer following the market. 

By definition, index funds match the market index and show why passive investors like index funds. Further, these funds have less volatility than funds trying to beat the market because they experience far less portfolio turnover, all things equal. 

In effect, index funds provide a powerful means for new investors to start investing money in stocks or for experienced investors to build their wealth. 

Index funds take the question out of which assets your portfolio should hold.  They can also pay dividends and be great income-generating assets

Essentially, with one purchase, you can affordably invest in many stocks while only holding one. Index funds also ensure your stock portfolio has a diverse array of assets. 

However, while diversification decreases risk, it does not eliminate it and you may still have a loss in a down market. In the case of downward market trading, you might consider inverse ETFs on Robinhood or shorting stocks on Webull, though both entail significant risk.

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If you want a diverse stock portfolio at a low cost and do not have confidence in which stocks to purchase, an index fund might act as a good route for you.

If You Also Want to Own Individual Stocks


If you want to hold individual stocks alongside these index funds to add some alpha potential to your portfolio, consider the following services to surface stocks:

motley fool stock advsior

My top pick of these subscriptions is Motley Fool’s Stock Advisor. The company highlights companies with consistent returns through steady performance over multiple years.

These so-called “Steady Eddies” serve as the foundation to your portfolio and have the ability to outpace the market. Consider signing up for your a 50% discount with a $99 first-year subscription.

If you aren’t satisfied with the service within 30 days, you can receive a full refund.

 

Also Consider These Other Top Investments for a Broadly-Diversified Portfolio


In addition to investing in index funds and individual stocks, you might also consider investing in non-traditional investments outside of the stock market.

These types of investments allow you to tap into assets which might not directly correlate with the stock market, diversifying your portfolio beyond just equities.

Some of these investing platforms also offer access to equities, but others allow you to buy into less travelled markets. Consider reviewing these investing opportunities for whether they make sense for your investment objectives and goals.

Benefits of Buying Index Funds on Robinhood


Two of the most significant benefits of getting your index funds on Robinhood include the simplicity and the lack of fees. Once you have downloaded the Robinhood app, verified your identity, and added funds, you can start investing in an index fund in a matter of minutes. 

Full details on this can be found in the next section. Just make sure to do a bit of stock research with the best apps on the index funds you have interest in before you start the purchasing process.

Some index mutual funds have a minimum dollar amount required to invest, such as $2,000. You might also encounter trading commissions, administration fees, or annual fund maintenance fees.

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Similarly, the best target date funds which use index funds can also require minimum initial investments.

However, you can avoid all of these costs with the Robinhood app and investing in index fund ETFs. Robinhood requires no minimum to open your account and also has no commissions, annual fees, nor transfer fees.

With this lack of cost, you might wonder how does Robinhood make money.

The only time you would pay a fee comes if you decide to upgrade to a Robinhood Gold account. This account has extra benefits, such as higher instant deposits, professional research from Morningstar, Level II Market Data from Nasdaq, and access to investing on margin. 

Robinhood Gold acts as a premium option for more in-depth trading and research.  You can always remain on the fee-free standard version to execute trades.

You Might Consider Index Funds on Webull Instead


webull sign up

Robinhood changed the retail investing game in 2013 but has since fallen behind of some of the other free stock trading apps for beginners for offering the most features and functionality.

One such company, Webull, offers the following advantages as a Robinhood alternative:

 

How to Open and Fund Your Robinhood Account


Once you have downloaded the Robinhood app, you will need to verify your identity by submitting photographs of your passport or driver’s license. You will also need to connect to a bank account in order to fund your account. 

The better choice likely comes from using a checking account as opposed to a savings account because this would avoid any potential transfer reversals or exceed your monthly allotted savings accounts withdrawals.

Specifically, when choosing a checking account to house your money, you will want to consider ones which have a free sign up and no minimum balance requirement.

Traditional banks tend not to qualify for these requirements because they often come loaded with fees.  Online banks now act as the best manner for avoiding these problems.

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