It amazes me, when I ask the nurses at the hospital how they have invested their 401-K money.  What kind of funds do you have?   I usually get the shrugs, the “I don’t know-I just did what they told me to do.”

Now there has been a big debate over the last few years on how to get people to pay more attention to retirement.

We all know that the odds of social security being there for us in our old age is between slim and none.  And if it is there, then the amount of money we will receive is unlikely to be enough to live a quality retirement.

I can hear it now-”Where do you want to eat out Friday, Harold?”  “Well, we can splurge honey,  cause I just sold some plasma, and found a bunch of cans this week!” “Dairy Queen, here we come-we may even be able to share the mini-sundae to go with our burger!!!!”

Maybe it’s because I am closer to retirement age than I am 20, but time passes in a hurry, and the better plans you make now, the smoother and more freedom you will have in retirement.

So today, as promised last week, I want to define a few terms to help with making decisions on where to put your 401-K money.

Now, when you are hired, or once a year, a benefits administrator will meet with you to explain what your 401-k options are, and to make changes in your choices if you have any.  Before you go the next time, I want you to be more informed, so will continue this series over then next few months.

So today, I want to talk about Index Funds.  As I mentioned last week, index funds hold stocks that make up an Index.  Common indexes are the S&P 500, the Russell 2,000, 3,000 and the Wilshire 5,000.  Is this a Stock Car race???

No the numbers are how many stocks make up the index.  The S&P 500 index holds 500 stocks, the Russell 2,000 contains 2,000 stocks….

Now, if the index holds 5,000 stocks, then it is holding all of the stocks of any consequence traded on a major stock exchange-like the NASDAQ or the New York Stock Exchange.  Now to make it even more complicated, the amount of each company stock, such as Coca Cola, is dependent on the “market capitalization” of each stock-that is the number of shares of that company that trade on the exchange, multiplied by the price of the stock.

So if a company has a market cap of 500million, and another has a market cap of 250 million, then the first company will have twice as many shares in the index.

Now to add another wrinkle, the mutual fund companies, can decide that they want to limit some companies from being in their “index fund”.  So their index fund may not be a true index fund-holding all the stocks-they may just hold stocks from that index that meet certain earnings criteria.  They do this to keep from buying what they consider “dogs” or poorly run companies.

Now, this is enough info on index funds for today.  In another post, I will explain in a little more depth, how to choose which index fund for your retirement account.

This stuff has to be dealt out in small doses, or it can become overwhelming in a hurry.  But like any of your classes in nursing school, you have to start somewhere.  And the more you read and study, the more sense this will make to you.

Now, if you need to know more in a hurry, this article on index funds is a good overview, but again, until you begin to understand the special language of investing, it may be difficult to comprehend on the first go-round….

So let the learning begin!!!!