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. 

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! 

1. Total Stock Market Index

2. 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.

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. 

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