How to Invest Like an Index Fund

Investing is thought to be a very demanding task that needs years of training and higher education. This is true for big and complex transactions, but it is not true for most of the time. It takes ten minutes to build a portfolio that tracks major indices like index funds. Yet, many companies charge fees for such funds.

Steps

1. Choose an index you like. You could choose S&P 500, for example. It is the most followed index in the US stock market.
   
2. Try to get a list of the biggest components of that index by size. In other words, what are the biggest companies in the S&P 500? (Decide how you are going to determine size by the way. Are you going to go with market capitalization?
   
3. Pick the biggest ten companies. General Electric and Exxon Mobile will most likely be in every index you could choose.
   
4. Buy them for your own portfolio.
   

Tips

• You could play with the percentage weight of each company in the portfolio for your own taste.
  
• You could pick the biggest ten, five, or two companies depending on your preference. Less companies mean more volatility to your portfolio.
  
• To get closer return to the index fund, invest more money in more companies.
  
• The following companies represent 10% of S&P500: Exxon Mobil, General Electric, Microsoft, Citigroup.
  

Warnings

• This method will overweight you for large caps, giving you no exposure to small caps, mid caps, and to 490 of the smallest large caps companies.
  
• This will result in the opposite of diversification for your money and your money will be at great risk.
  
• No one can get the exact performance of the index tracked .However, if you invest in a mutual fund, you will get the return of the index, less whatever small percentage that fund charges you in fees. This is your best bet.
  
• Caution must be taken when changing the weight of the companies to make them different than the index.
  
• This technique is really playing with fire.
  
• Instead you should consider investing in a index fund or an exchange traded fund. Both of these solutions are generally far more desirable and much better. For instance, you would normally pay only small up-front and ongoing fees to buy an interest in a fund which represents interesjavascript:void(0)ts in many, many different stocks, not a fee for each stock.
  

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