Index funds are the simplest road to wealth.
What the hell is an index fund?
Index funds were create by Jack Bogle, the founder and CEO of the Vanguard Group. He recently passed away and was one of my personal heroes. He really changed the world and has made the world a better place, particularly for investors.
An index fund is a set of parameters used to follow a basket of assets.
When you buy into an index fund, you are buying into all of the assets in the chosen basket. The most popular form of an index fund is the overall market, S&P 500. This tracks the entire market and your investment moves up and down with the market. If the market goes up 20% so does your investment. If it goes down 20% so does your investment. You can choose an index fund that is stable with low returns or you can choose one that will get you higher returns, but be more volatile.
You can find index funds that follow all kinds of assets; gold, technology, oil etc.
Jack Bogle was revolutionary, because he claimed that an investor would do better investing in the entire market than trying to pick winning and losing stocks. Prior to index funds individual investors had to go through a broker to purchase equities so many investors were automatically shut out of investing.
Bogle also went against many financial firms because of one issue. Fees. Vanguard offers really low fees. Thankfully many companies are following their example, because of their popularity. But not all of them.
There is so much money to be made from selling investments to investors. It is in the interest of financial firms and their shareholders to have the highest fees possible. More profit. But it is not in the best interest of the investor.
You should always look at the fees before making an investment. The stock could be great, but if the fees to own it are high, then it will kill any long term gains.
You are not Warren Buffet. So you should leave the stock picking to him. Full disclosure: I still use a small fraction of my portfolio to invest in companies that I love and want to succeed. It is fun and I do believe in voting with your dollars. I also want to see green energy companies succeed. But the bulk of your investments are in an index funds.
Like I said before there are million different index funds out and they continue to grow in popularity so more are being created each year.
Here are the Index funds that I really love:
- VOO – Vanguard S&P 500 Index Fund
- VUG – Vanguard Growth ETF
- VTI – Vanguard Total Stock Market Index Fund
- VGT – Vanguard Information Technology ETF
- QQQ – Invesco QQQ ETF
- VBMFX – Vanguard Total Bond Market Index Fund
- VBISX – Vanguard Short Term Bond Index Fund
- FNILX – Fidelity Large Cap Index Fund
- FTIHX – Fidelity Total International Index Fund
- FPADX – Fidelity Emerging Market Index Fund
What to watch out for in an index fund:
- The expense ratio AKA fees. The expense ratio is the cost index fund administration charges each year to run the fund. Sometimes this number is low and sometimes this number is high. The higher the expense ratio, the more the business providing the fund makes in profit.
- Historical performance – Dont’t juat look at the past year. Look at the lifetime performance of the fund.
- what company provides the fund? Are they reputable.
When you were choosing an index fund you need to ask yourself what is my long term goal?
- Steady growth with less volatility – invest in a bond fund
- Market growth? Total Stock market fund
- Sector growth? Technology, oil/gas, financials
- Safety against a downturn in equities? Gold, commodities
- Companies outside of the US – International markets
Never invest your hard earned money without a strategy.
It is better to do nothing then to make a decision that you do not understand.
How old are you? What season of life are you in? Wealth accumulation or wealth preservation? These questions will determine which index funds you choose for your portfolio. This will be your asset allocation.
If you are younger, be more aggressive and invest in all equities and possibly a sector index fund or a growth index fund.
If you are reaching retirement age and more concerned about wealth preservation invest primarily in a bond fund and less in an equities fund.
Keep it simple
Investing should not be complicated. Making your investments complicated does not guarantee better results. Often it can be more costly due to increased fees.
Choose 1-3 funds that you feel meet your needs and move on. This is not rocket science and investing in too many different funds will hurt your performance. The whole point of investing in index funds is to make your life easier and get great results.
Set up automatic deposits every month or every paycheck.
Be consistent. The compound interest snowball works a lot faster if you add fuel to it.
Questions? Email me. I read them all.
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