Warren Buffett — literally one of the greatest investors ever — has said that most people should just buy an index fund and call it a day. When the guy worth $120 billion says \
What Is an Index Fund?
An index fund is a type of investment that tries to match the performance of a specific market index. What's an index? It's just a list of stocks that represents a chunk of the market.
The most famous index is the S&P 500 — the 500 biggest publicly traded companies in the US. An S&P 500 index fund holds all 500 of those companies in the right proportions.
When people say \"the market was up 2% today,\" they're usually talking about the S&P 500. So by buying an S&P 500 index fund, your returns basically match \"the market.\" Historically, that's been about 10% per year on average.
Why Index Funds Beat Stock Picking
Here's an uncomfortable truth: about 90% of professional fund managers fail to beat the S&P 500 over a 15-year period. These are people with finance degrees, Bloomberg terminals, and decades of experience — and they still can't consistently beat a basic index fund.
Why? Because the stock market is incredibly efficient. By the time you hear about a \"hot stock,\" the price already reflects that info. Trying to outsmart the market is like trying to beat a casino — you might win sometimes, but the house wins long-term.
Index funds don't try to beat the market. They just match it. And matching the market consistently beats trying to beat it. That's the paradox of investing.
Index Funds vs. ETFs
Confused? You're not alone. Here's the simple version:
- Index fund = the strategy (track an index)
- ETF = the vehicle (how you buy it)
Many ETFs ARE index funds. For example, VOO is an ETF that tracks the S&P 500 index. It's an index fund packaged as an ETF.
You can also buy index funds as mutual funds, which trade differently (once a day vs. all day). But for most teens, buying index funds through ETFs is the easiest route.
Best Index Funds for Teens
Start with one of these and you'll be doing better than most adult investors:
- VOO or SPY: S&P 500. The classic.
- VTI: Total US market. Even more diversified than S&P 500.
- VXUS: International stocks. For global diversification.
- VT: Literally the entire world stock market in one fund.
A super simple starter portfolio: 90% VTI + 10% VXUS. That gives you the whole US market plus some international exposure. Total cost: about 0.04% per year in fees. That's 40 cents per $1,000 invested.
Learn more about building a full portfolio in our portfolio guide.