How much of each stock do index funds hold?
In general, the goal of an S&P 500 index fund is to replicate the performance of the S&P 500 Index.  To do this, the fund will buy the same stocks in the same proportions as the weighting of the Index. The S&P 500 Index is free-float capitalization weighted.  This means that the higher capitalization stocks (based on publicly traded shares only) are more heavily weighted and factor into the Index value more heavily than the smaller capitalization stocks, or the stocks that have a smaller publicly traded value.  For example, companies like Apple, ExxonMobil, and Microsoft have a much larger weight in the index value than smaller companies. Alternatively, there are some S&P index funds that are equal-weighted.  In these funds, the managers have chosen to purchase all 500 of the stocks in the index, but in equal proportions instead of the weighted proportions of the index.  These equal-weighted funds will not as closely match the index price as the traditionally weighted index funds.  Instead, they might do better or worse than the index, depending on how the individual stocks do. You'll need to look at the prospectus of the index funds you are interested in to see which approach the fund is taking. An index fund is just copying the definition of an index. The group that defines the index determines how to weight the different parts of the index. The index fund just makes sure they invest the same way the index creator wants.  Think of a non-investment scenario. A teacher can grade tests, quizzes, homework, in-class assignments, research papers. They decide how much weight to give each category and how much weight to give each part of each category. when a student wants to see how they are doing they take the information in the syllabus, and generate a few formulas in a spreadsheet to calculate their current grade. They can also calculate what they need to get on the final exam to get the grade they want. Yes, it depends on the fund it's trying to mirror.  The ETF for the S&P that's best known (in my opinion) is SPY and you see the breakdown of its holdings.  Clearly, it's not an equal weighted index. "Note that an index fund may not be able to precisely mirror the index it's tracking. If enough many people invest enough money into funds based on that index, there may not always be sufficient shares available of every stock included in the index for the fund to both accept additional investment and track the index precisely.  This is one of the places where the details of one index fund may differ from another even when they're following the same index. IDEALLY they ought to deliver the same returns, but in practical terms they're going to diverge a bit. (Personally, as long as I'm getting ""market rate of return"" or better on average across all my funds, at a risk I'm comfortable with, I honestly don't care enough to try to optimize it further. Pick a distribution based on some stochastic modelling tools, rebalance periodically to maintain that distribution, and otherwise ignore it. That's very much to the taste of someone like me who wants the savings to work for him rather than vice versa.)"
"when the index is altered to include new players/exclude old ones, the fund also adjusts The largest and (I would say) most important index funds are whole-market funds, like ""all-world-ex-US"", or VT ""Total World Stock"", or ""All Japan"".  (And similarly for bonds, REITS, etc.)  So companies don't leave or enter these indexes very often, and when they do (by an initial offering or bankruptcy) it is often at a pretty small value. Some older indices like the DJIA are a bit more arbitrary but these are generally not things that index funds would try to match. More narrow sector or country indices can have more of this effect, and I believe some investors have made a living from index arbitrage.  However well run index funds don't need to just blindly play along with this. You need to remember that an index fund doesn't need to hold precisely every company in the index, they just need to sample such that they will perform very similarly to the index.  The 500th-largest company in the S&P 500 is not likely to have all that much of an effect on the overall performance of the index, and it's likely to be fairly correlated to other companies in similar sectors, which are also covered by the index.  So if there is a bit of churn around the bottom of the index, it doesn't necessarily mean the fund needs to be buying and selling on each transition.  If I recall correctly it's been shown that holding about 250 stocks gives you a very good match with the entire US stock market." "Following comments to your question here, you posted a separate question about why SPY, SPX, and the options contract don't move perfectly together.  That's here Why don't SPY, SPX, and the e-mini s&p 500 track perfectly with each other? I provided an answer to that question and will build on it to answer what I think you're asking on this question.  Specifically, I explained what it means that these are ""all based on the S&P.""  Each is a different entity, and different market forces keep them aligned.  I think talking about ""technicals"" on options contracts is going to be too confusing since they are really a very different beast based on forward pricing models, so, for this question, I'll focus on only SPY and SPX. As in my other answer, it's only through specific market forces (the creation / redemption mechanism that I described in my other answer), that they track at all.  There's nothing automatic about this and it has nothing to do with some issuer of SPY actually holding stock in the companies that comprise the SPX index. (That's not to say that the company does or doesn't hold, just that this doesn't drive the prices.)  What ever technical signals you're tracking, will reflect all of the market forces at play.  For SPX (the index), that means some aggregate behavior of the component companies, computed in a ""mathematically pure"" way.  For SPY (the ETF), that means (a) the behavior of SPX and (b) the behavior of the ETF as it trades on the market, and (c) the action of the authorized participants.  These are simply different things. Which one is ""right""?  That depends on what you want to do.  In theory you might be able to do some analysis of technical signals on SPY and SPX and, for example, use that to make money on the way that they fail to track each other.  If you figure out how to do that, though, don't post it here.  Send it to me directly. :)" How do (index and active) mutual funds trade? Do they buy stocks as soon as a I buy a share in the mutual fund, or do they have fixed times they trade, such as once every week/month/quarter?   Is it theoretical possible for someone to front run mutual funds, if someone holds individual stocks? Let's say an institutional investor creates an order of $100m in a mutual fund, how likely can a broker, which holds a fraction of the fund's portfolio, front run and take advantage of that trade? It is more likely to front run that fund if it's an active small cap fund, but how likely is it to front run trades for index funds? "Aggressiveness in a retirement portfolio is usually a function of your age and your risk tolerance. Your portfolio is usually a mix of the following asset classes: You can break down these asset classes further, but each one is a topic unto itself. If you are young, you want to invest in things that have a higher return, but are more volatile, because market fluctuations (like the current financial meltdown) will be long gone before you reach retirement age.  This means that at a younger age, you should be investing more in stocks and foreign/developing countries. If you are older, you need to be into more conservative investments (bonds, money market, etc).  If you were in your 50s-60s and still heavily invested in stock, something like the current financial crisis could have ruined your retirement plans.  (A lot of baby boomers learned this the hard way.) For most of your life, you will probably be somewhere in between these two.  Start aggressive, and gradually get more conservative as you get older.  You will probably need to re-check your asset allocation once every 5 years or so. As for how much of each investment class, there are no hard and fast rules.  The idea is to maximize return while accepting a certain amount of risk.  There are two big unknowns in there: (1) how much return do you expect from the various investments, and (2) how much risk are you willing to accept.  #1 is a big guess, and #2 is personal opinion. A general portfolio guideline is ""100 minus your age"".  This means if you are 20, you should have 80% of your retirement portfolio in stocks.  If you are 60, your retirement portfolio should be 40% stock.  Over the years, the ""100"" number has varied.  Some financial advisor types have suggested ""150"" or ""200"".  Unfortunately, that's why a lot of baby boomers can't retire now. Above all, re-balance your portfolio regularly.  At least once a year, perhaps quarterly if the market is going wild.  Make sure you are still in-line with your desired asset allocation.  If the stock market tanks and you are under-invested in stocks, buy more stock, selling off other funds if necessary.  (I've read interviews with fund managers who say failure to rebalance in a down stock market is one of the big mistakes people make when managing a retirement portfolio.) As for specific mutual fund suggestions, I'm not going to do that, because it depends on what your 401k or IRA has available as investment options.  I do suggest that your focus on selecting a ""passive"" index fund, not an actively managed fund with a high expense ratio. Personally, I like ""total market"" funds to give you the broadest allocation of small and big companies.  (This makes your question about large/small cap stocks moot.)  The next best choice would be an S&P 500 index fund. You should also be able to find a low-cost Bond Index Fund that will give you a healthy mix of different bond types. However, you need to look at expense ratios to make an informed decision.  A better-performing fund is pointless if you lose it all to fees! Also, watch out for overlap between your fund choices.  Investing in both a Total Market fund, and an S&P 500 fund undermines the idea of a diversified portfolio. An aggressive portfolio usually includes some Foreign/Developing Nation investments.  There aren't many index fund options here, so you may have to go with an actively-managed fund (with a much higher expense ratio).  However, this kind of investment can be worth it to take advantage of the economic growth in places like China. http://www.getrichslowly.org/blog/2009/04/27/how-to-create-your-own-target-date-mutual-fund/" "It appears that there's a confusion between the different types of average. Saying ""the average investor"" generally means the most common type of small-scale unsophisticated investor - the mode (or possibly median) investor. However, while this class of investors is numerous, each of them has assets that are quite small compared to some other types of investors; and the market average performance is determined proportionally to the amount of assets held, not to the number of holders; so the performance of large investors ""counts"" that much more. For any measure, the mode of performance can be (and often is) different from the mean performance - in this case, Dalbar is saying that the most common results are lower than the (weighed) average results." The S&P500 is an index, not an investment by itself.  The index lists a large number of stocks, and the value of the index is the price of all the stocks added together. If you want to make an investment that tracks the S&P500, you could buy some shares of each stock in the index, in the same proportions as the index.  This, however, is impractical for just about everyone. Index mutual funds provide an easy way to make this investment.  SPY is an ETF (exchange-traded mutual fund) that does the same thing. An index CFD (contract for difference) is not the same as an index mutual fund.  There are a number of differences between investing in a security fund and investing in a CFD, and CFDs are not available everywhere. "Mutual funds invest according to their prospectus. If they declare that they match the investments to a certain index - then that's what they should do. If you don't want to be invested in a company that is part of that index, then don't invest in that fund. Short-selling doesn't ""exclude"" your investment. You cannot sell your portion of the position in the fund to cover it. Bottom line is that money has no smell. But if you want to avoid investing in a certain company and it is important to you - you should also avoid the funds that invest in it, and companies that own portions of it, and also probably the companies that buy their products or services. Otherwise, its just ""nice talk"" bigotry." Diversified is relative. Alfred has all his money in Apple.  He's done very well over the last 10 years, but I think most investors would say that he's taking an incredible risk by putting everything on one stock. Betty has stock in Apple, Microsoft, and Google.  Compared to Alfred, she is diversified. Charlie looks at Betty and realizes that she is only investing in one particular industry.  All the companies in an individual industry can have a downturn together, so he invests everything in an S&P 500 index fund. David looks at Charlie and notes that he's got everything in large, high-capitalization companies.  Small-cap stocks are often where the growth happens, so he invests in a total stock market fund. Evelyn realizes that David has all his money tied up in one country, the United States.  What about the rest of the world?  She invests in a global fund. Frank really likes Evelyn's broad approach to equities, but he knows that some portion of fixed-income assets (e.g. cash deposits, bonds) can reduce portfolio volatility—and may even enhance returns through periodic rebalancing. He does what Evelyn does, but also allocates some percentage of his portfolio to fixed income, and intends to maintain his target allocations. Being diversified enough depends on your individual goals and investing philosophy.  There are some who would say that it is wrong to put all of your money in one fund, no matter what it is.  Others would say that a sufficiently broad index fund is inherently diversified as-is.