Tutorial: choose an index fund
The fee is the only variable here you control with certainty, and it compounds against you for forty years.
Pick a core holding you never have to think about again.
How choose an index fund works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
- 1
Check the fee, then check it again
A 1% annual fee sounds trivial and typically consumes something in the order of a quarter of your final pot over a working lifetime. Against a 0.07% tracker, the difference is not a rounding error, it is a house.
- 2
Check what it actually holds
Not all ETFs are broad index trackers. Many are narrow, thematic, leveraged or expensive, and they borrow the reassuring word 'ETF' to sound like the safe kind. Read the holdings.
A leveraged ETF held for the long term will lose money even if the index goes nowhere. They are trading instruments, not investments.
- 3
Check the size and the spread
A tiny fund can close and force you to sell at an inconvenient moment. A thinly traded one costs you on the bid-ask spread every time you touch it.
- 4
Then stop looking at it
The core of a portfolio should be boring enough that checking it is pointless. If you have chosen well, the next twenty years require nothing from you except that you do not interfere.
You can state your fund's fee, what it holds, and why you will not be changing it.
Read next
The fee is the only variable here you control with certainty, and it compounds against you for forty years.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.