The big ideaAn index fund holds a little of many things, so no single one decides the result.
How it works
Nobody can know which garden will win, and last year's winner may not win next year. If all 100 coins sit in one garden, it could leap to 140 or shrink to 50.
The basket keeper put ten coins in each of the ten gardens, so Ana's hundred was spread out.
The basket follows a list of gardens, and that list is called an index. A basket that follows the list with no guessing is an index fund.
A basket is not magic: in a hard year most gardens fall together, but it falls less than one bad garden might.
Ana's basket after a good year.One garden or a basket.
Example 1: Spreading a hundred
Ana has 100 coins and ten gardens.
10 × 10 = 100
So each garden gets 10 coins.
Example 2: A good year
Four gardens end at 14 each: 4 × 14 = 56.
Four gardens end at 11 each: 4 × 11 = 44.
Two gardens end at 5 each: 2 × 5 = 10.
56 + 44 + 10 = 110
Example 3: A hard year
Eight gardens fall to 8 each: 8 × 8 = 64.
Two gardens rise to 12 each: 2 × 12 = 24.
64 + 24 = 88
The basket falls to 88, but it falls less than one bad garden might.
Example 4: One bad garden
In one garden, ten coins can shrink to five.
10 − 5 = 5
In the basket that is a loss of only 5 coins out of 100.
Words to know
index
A list of gardens that a basket follows.
index fund
A basket that follows the list, with no guessing.
spread out
A little in each of many gardens.
basket
Where Ana keeps a little of every garden.
Watch out
A basket is not magic. In a hard year most gardens fall together.
A basket cannot promise a gain. It only spreads out the risk.
Last year's winner may not win next year, and nobody can guess the winner.
The keeper asks a small fee for the work, and fees are another story.
Try it
Ana puts 10 coins in each of 10 gardens. How many coins is that in all?
Four gardens end at 14 each. How many coins do they hold?
What does an index fund follow?
Can a basket of many gardens fall in a hard year?
Answers: 1. 100 coins · 2. 56 coins · 3. A list of many gardens · 4. Yes
Try at homeFill a basket with small things from different drawers. Ask a grown-up why spreading out helps.
For grown-upsFill a basket with small things from different drawers and talk about why spreading out helps. This is a made-up story about pretend coins and says nothing about any real investment or what to buy.
Open these notes on screenScan the code, or go to tutorpip.com.