What this lesson is about
One of the most consequential ideas in investing history was strikingly simple: stop trying to beat the market, and just buy all of it instead.
Part 1 of 2
One of the biggest ideas in investing history is surprisingly simple: instead of picking winning stocks, why not buy a bit of all of them? That’s what an index fund does. Rather than having a manager research and select individual stocks in hopes of beating the market, an index fund tracks a specific market index, like the S&P 500. It holds all or a representative sample of that index's components in roughly the same proportions.
This method is known as "passive" management. In contrast, "active" management involves a fund manager making ongoing decisions to outperform a benchmark index. Passive management needs much less research, trading, and judgment. Because of this, index funds usually charge lower fees than actively managed funds. Often, it's just a small fraction of a percent per year, while actively managed funds tend to have much higher fees.
Quick check
What is an index fund?
An index fund's goal isn't to outperform its target index - it's to match its performance as closely as possible, at a low cost.
Part 2 of 2
Quick check
What is the key difference between "passive" and "active" fund management?
Passive management follows an index mechanically; active management relies on a manager's judgment to try to select better-performing investments.
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