Have you been wondering what exactly it means to be an index fund investor? We're going to break down how index fund investing actually works.

Index Fund Investing Vs. Stock Picking

Whenever you think about index fund investing, think about an index as something that is tracking the performance of something else.

Some examples are:

1. The tech industry- what is the overall performance .

2. What is the index of the overall best Premier League players out there.

An index is just something tracking something.

When you think about investing into an index fund, what you're really doing is investing into something that's tracking an overall performance of whatever industry you actually want to invest into.

Let's break this down for our analogy:

So we've got Cooler 1, which tracks the tech industry. Inside we have: Puff Puff - Amazon Samosa Facebook Spring roll-Samsung BBQ chicken - Apple Asun - Tesla

An index fund investor will take a variety of small chops (diversification) to reduce the likelihood of one being bad, whereas a stock picker will only choose one thing.

For index fund investors, it doesn't matter if one company fails or your piece of chicken is stale because you still have other things in the cooler to fall back on, whereas if all your chicken is stale and the company you picked fails, you'll lose everything.

Picture this, you're at an Owambe, and there are 3 coolers full of small chops. Imagine cooler 1 tracks companies in the tech industry, cooler 2 is real estate, and cooler 3 is healthcare. Whatever cooler you choose to invest in - all you're literally doing is buying every single company that's a part of that industry.

So, for example, when people say they are invested in the S&P 500 - all that really is is a cooler of the top 500 largest companies, and when you invest in this cooler, you're investing into every single one of these companies and getting the average return every year of that overall. index. Simple right?!

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