Investing Series Part 5 - Index Funds
The simplest and most effective path to wealth!
The simplest and most effective path to wealth!
What if I told you there is an easy and simple investment way? You don't need to hire a financial advisor to do this, and it is the most effective, historically proven way to invest. Would you do it?
Unfortunately, the answer is mostly no! Most Americans don't invest and the ones that do have fallen in love with stock picking or give over the management of their funds to financial advisors. Because 99% of them underperform the market. They aren't "average" they are "below average." Most people get "below average" returns because they chase "above average" returns (or marketing).
Oddly, the simplest form of investing is the cheapest and most effective.
What is index fund investing? Index fund investing is putting your money into a passively managed fund that buys whatever the index of that fund is. For example, I like VTSAX, which buys the Total US Stock market, about 3700 companies. The expense ratio as of writing this is at .04%. I just put my money in tax advantage accounts during my wealth accumulation phase.
To understand index funds that follow the stock market, you must understand stocks. Sometimes called shares or equities. A stock is a piece of ownership in a company. So if you bought stock in Apple, for instance, you would be buying a piece of ownership in Apple. Cool actually. In the US, there are around 3700 publically traded companies. This means anyone through a brokerage can buy stocks in those companies.
Next, we have to understand mutual funds. Mutual funds were created as a way to pool money together and buy a collection of stocks in one fund. They were first created in 1924 in the US and were a way to spread out risk between multiple stocks. This was the first step in moving away from stock picking. An index fund is just a passively managed mutual fund. Before 1971, all mutual funds were actively managed.
Index funds were created in 1971, and in 1974, Jack Bogle made this the foundation of his company , where indexes were created that followed the market.
Why Index Funds Over Stock Picking
I going to deflate everyone's ego a little bit and say it. Because 99.9999% of people stink at picking stocks, I mean really stink. Everyone thinks they are the next Warren Buffet, but you aren't. Suppose you like the adrenaline rush. Then fine, put a small percentage into stock picking, but I recommend putting a bulk of your portfolio in index funds.
Why Index Funds over Actively Managed Funds
One word FEEs. Assuming the performance is the same for actively and passively managed index funds, fees will eat away at your investment like no tomorrow. Costing you $100k or more in your investing lifetime and maybe even more. Take fees out of the equation. Most active managers don't beat the market in any given year. There are a few (less than 1 percent) that do consistently. Again I would ask you to check your ego. This means that you can pick a great active fund manager. And I honestly don't believe you can.
Conclusion
Investing in index funds is simple and the most effective way to invest your cash for the long term.
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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professionals before making any significant decisions.
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Updated 10/31/23