Using Index Funds to Invest like a Pro!
Written By: Nick Nguyen | Read full profile
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Even if you don’t plan on day trading and getting into the stock market, everyone who owns or plans to own a retirement account (IRAs, 401k, 403b, 457b, etc.) should consider investing into index funds at some point in their life.
Don’t confuse index funds with mutual funds. If you want to know more about the similarities and differences of each of them, check out my other post here. But basically, index funds take a passive approach to investing. This is typically the best way for the common person who doesn’t want to spend a ton of time researching financials, P/L sheets, and watching the news to manage their portfolio with minimal effort.
Traditionally, financial advisors will tell you to diversify your investments. Especially after so many people lost everything from the Enron scandal in 2001 when they put all their eggs into one basket. But this can be tough because you don’t know which stocks and bonds to choose, what ratio of stocks to bonds you should be holding, etc.
So financial personnel jump on this and tell you they’ll take care of everything for you! All you have to do is pay them a modest fee of 1-2%. (What you really want is a financial advisor who charges you on a fee-basis, but that’s a discussion for another time).
But honestly, if you don’t have much money, don’t have the time to try to learn about the whole investment thing, or even to chat with a financial advisor, you can just use 2 index funds to keep it simple!
Total Stock Market Index
Total Bond Market Index
The general rule of thumb to mitigate risk is to hold the percentage of stocks equal to 100 minus your age. So, as I’m writing this, I’m 25 years old. That means that 75% of my portfolio should be made up of stocks! The other 25% should be used for bonds.
Remember, stocks are very volatile but at the same time give you a chance to get a lot of growth! Bonds on the other hand are more stable and result in a safer return on your money. The big question becomes, which stocks and bonds do I buy and put into my account?
Realize that the stock market only continues to go up in the long-run. It’s been that way since its inception in 1601.
Dow jones avg growth 1900-present Stockcharts.com
So mitigate your risk by buying everything. The beauty of a Total Stock Market Index and a Total Bond Market Index is that it holds a piece of every single stock and bond in the market. Now you’re hedging your bets for long-term growth without having to do too much research and at a fraction of the cost!
Index funds have expense ratios ranging from 0.015% to 0.25%, pending on which brokerage you’re buying the fund from. And if the market continues its upward trend at the consistent 6-7% average return it has been over the last several decades, you’re doing as well if not better than your financial advisor.
For context, some years will be up (like from 2018 to 2019 that saw a 30% jump in the total stock market before the pandemic) whereas other years may go down. The key is that this is for long-term investing.
Check out my post comparing the different index funds with their expense ratios from the 3 OG brokerages: Vanguard, Fidelity, and Charles Schwab.
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
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