What is "Indexing"?

Indexing is a passive long term investment strategy.

Indexing can be achieved with mutual funds or exchange traded funds (ETFs) which closely tack the performance of the underlying index.


SPDR S&P 500 ETF (or SPY) is an example of an ETF which closely tracks S&P 500 index.
SPY holds 500 companies that make up S&P 500. 
People like indexing because with little effort this is a way to diversify. The 500 companies of the SPY are supposed to be approximately 80% of the overall US stock market.


With this method the investor will:
1. Achieve the same rate of return as the underlying index.
2. Will be exposed to the same risks as the underlying index.
3. Achieve a good degree of diversification.

Most of my investments are in index funds at this time. As mentioned above, it is easy, it is diversified and the return averages are acceptable. 

I have another post about how I do indexing for myself: Indexing simplified.