Glad you asked, because it can be a terrific part of a retirement portfolio. But first you need to know what a stock index is.
Thousands upon thousands of individual stocks are traded in the United States and around the world. A number of so-called indexes have been set up to track how a particular part of the stock market – or the stock market as a whole – is doing. There are indexes that track large-cap companies, small-cap companies, the entire stock market and so on. One of the most common indexes is the Standard & Poors 500, known as the S&P 500, which represents a broad cross section of 500 large American companies.
What an index fund does is simple: It invests in the entire index. For example, an S&P 500 index fund buys all the stocks in the S&P 500 index. And thats it.
Just about every major mutual fund family offers index funds.