Today we’re going to talk about one of my favorite ways to invest ever beside real estate and I would even go as far to say that it’s one of the safest and easiest long term investment strategies out there for most people and also the is the investment strategy that requires very little work, no skill needed and still has some of the best returns out there and even more surprising, what if I told you that this investment outperformed 99% of the individual investors and almost 95% of hedge funds and this is something that you can do with about 20 minutes of your time and I’m talking about index fund.
And let’s go over what an index fund is how it works and how you can set thus up yourself in a matter if minutes to profit long term and then maybe you get like a Lamborghini rich or buying private island.
So first of all, let’s start here, what exactly is an index fund, an index fund is really just a group of investments that you can put your money into and then you’ll own a percentage of the entire thing.
Here’s an example, imagine If I own a thousand apartments buildings and they each worth $1,000 I go to you and I say I will sell you one of my buildings for a $1000 company, but Te problem here KS that now you only have one apartment building or one investment and what happens if that investments doesn’t fiver well, or maybe that one company that you invested in has a CEO that loves to talk on twitter and he ends up saying some stupid stuff that gets him in trouble with the NEC and the company doesn’t Co very well in the short term. How do you prevent something like that, well here’s the solution to it, imagine in my previous example where I gave you a scenario, where instead of investing 1,000 and you buy one of my apartment buildings, imagine if you invest $1000 and you get 0,1% Return Of everything that I owned, so you’re a small percentage owner, in all of my apartments buildings, thud way you’ll get an average return based of everything that I own, this is basically an index fund.
For example, you can own all of the top 500 publically traded companies in the US, for a low price for just about $260, thus you’re not just only buying stocks in one company but instead you’re buying literally all of them, with idea funds, you can pretty ugh do this with any market out there, if you want to own a small portion of pretty much every international stick out there while you can do that for just a low price of just 28 dollars or you can own a small portion of the entire US stock market for just a low price of just $70, and it doesn’t stop there because there are index funds for pretty much any single market out there like you want go invest in bonds, there you go or you want to buy a whole bunch of real estate buy you don’t want to get one reason index funds after this with a whole bunch of hospital buildings and returns and your money ends up going a very long way when you start doing this but that they laid the question of Why exactly does this makes such a good investment, well let me give you the biggest advantage of index funds is that they have very low fees, that’s because these indexes are very simple to put together, they’re very simple to manage, there isn’t much overhead and more of the savings get passed to you as the investor and this is what’s known as a passively managed fund.
You’re buying into an entire portfolio of stocks that theoretically gets balanced and adjusted over time without doing any work and then paying as low as 0.04% annually to do so, that’s thr total opposite of what a mutual fund does.
A mutual fund is a type of fun that employees professionals stock pickers who buy and sell stocks overtime to try to beat the market average, however all the additional expenses associated with doing this as well as all the fees associated with buying and selling ultimately gets passed down to you as the investor in the form of a much higher fees and all of that is without the guarantee of actually beating the market in the first place.
And speaking of that when you compare the performance between The two, both index funds and mutual funds, it’s found that only 22% of actively traded funds actually beat the market a over a 10 year period, that was it out about, only 22% actually achieved that result so that means that it 70% of all the situations you’re better off and when you have made more money by just investing in an index fund for over 10 years, now the second advantage of doing this is that most investing in individual sticks on their own several studies have shown that even a 92 to 95 percent of portfolio managers could not outperform the market index over a 15 year period.
Now keep in mind that these are the people who are the brightest in the fields who have gone to high league schools with their really deep understanding of economics and finance who do this full time daily and Not even they can outperform just the market index.
And these figures are so much more far the average individuals investors and a big reason for that is that many investors Ted to trade emotionally and panic when the market drops and they try to time the market and they jump into a stock as its going up for the fear of missing out because of that they usually co-relate to much lower than the average returns and also in an interview in 2017, Warren Buffet had to say that attempting to pick stocks for 99% of the population, he even went as far as to bet a collection of hedge fund managers 1 million dollars that they couldn’t beat the market over a 10 year period and outperformed an index fund literally a standard vanguard index fund outperformed the best hedge fund managers in the entire world for a million dollars bet, and if the wealthiest person right now is telling all of us to buy index fund, then I have a feeling that is something we should probably listen to.
Another benefit of index fund is diversification it offers, like even if you have up to 20 individual sticks and the stock portfolio, of one of those goes down and fails you can end up losing a lot of money, but on the other hand, if you go and buy the entire SP 500 index funds you have, you have 500 different stocks in different companies that you doesn’t really matter because we have 44, others to boost how up, this means that having the few individuals companies go up or down in the market.
In the short term won’t really affect your overall return because you’re betting long term that the market will rise overall as a whole has also doing this as an investor will give you a lot more market stability because let’s be real, most people can’t handle the market volatility and as soon as they see it go down, they panic and they freak out and Rudy sell it and then they see it going up and then they buy back in because they see it going back up again.
They can’t handle any sort of market volatility so just by virtue of that and recognizing the human tendency that we tend to freak out over the smallest things and people tend to get emotional , an index fund will solve most of these issues and then the fourth.
The reason I invest in index funds, is because my only investments besides real estates is because it takes no time to do and it’s easy, I just love the simplicity of it, I also fully acknowledge that I am a stick market expert, so I can not buy and sell stocks that will consistently beat the market long term and nor do I want to spend all of that time reading chat, news and reports.
That will allow me to make those types of decisions and even if I took all the time to do that and I really dedicated myself to trading stocks and trying to beat the market, if 95% of finals professionals the most skilled people in the world cannot consistently beat the market long term, what makes me think that I can, I know y limitations and I will just work around that instead I will just invest in the entire market sit back and relax and focus my time on other areas that would make me even more money that I can reinvest back into the marker and I would even go far and day that for most people watching and just investing in an index fund to get the highest overall return long term and I got to say that my doing that, it’s so much less stressful and it’s literally just a buy it and forget it mentality, there is no panicking in the middle of the night worrying about earning reports tomorrow, there is not worries what so ever.
I just know that index funds are my second largest investments besides real estates and I have no concern that long term over all the will be trending up.
So with that out of the way what’s the best way to go about doing this and that the best investment for you to buy.
Now my favorite index fund investing mangers is basically what I call the 3 fund portfolio, this is also one of the most popular index fund strategies and like I said earlier beats 99% Of the individual investors long term over a 10 year period.
And as the name suggest it’s basically consist of 3 funds obviously, the first fund is a US stock market index, the second stock is an international stock market index and the third fund is a bind market index, that is it, this gives you the broadest diversification at the absolute cheapest cost and it’s going to give you the highest return over an from just about almost anything else that you can do on your own, not only that but because you’re investing in multiple assets classes, you gave three almos5 co-related market that you have your money into so that way it something happens to one you have two others that will balance that out, so how was us this to do, well, have 3 funds that index funds has, that can basically be the entire portfolio.
First you have US stocks and that would be the vanguard stick market index funds, then you have the international stocks and then you have binds the total bonds marketing index funds, but With theses In terms of how much and what are the things to buy, it’s really depends on how close you are you are to retirement, the general rule of thumb when it comes to this is the further, you are from retirements, the more aggressive you should be with your portfolio which means the more stocks that you should have.
When you’re closer to retirement, the less aggressive you have to be, the less stocks and risk you should take the more bonds you should have.
So which means if you’re anything like me, you’re in your 20’s or 30’s chances are you’d be fine with 70 to 90 percent sticks and then 10 to 30 percent in bonds, and then just buy it and hold that for 3 to 40 years, they also gives you the best chances to recover in any sort if market drop and the return because you know over the long term, the value is going to be riding over time, also if you’re a few years away from retirements it might be a good idea to go, maybe 80 to 85 percent bonds and then 20% in stocks Di that way you’ll have a much safer stable return in retirement.
But when it comes to me personally I’m putting my 70% in US stocks to you in international stocks and then 10 percent in bonds, and then I’m planning to hold all if this and contribute to it regularly over the next 30 years with out changing enough without doing a single thing, it’s just by hold, reinvest hold buy more and hold, keep holding, keep buying more and holding.
And like I said for most people this would have the highest Return Of anything that you can do yourself in the stock market, ling term and overall on average and even though with me, real estate is being my number one investments over the last 10 years, I still invest in index funds because I totally recognize the benefit of the diversification and the stability of doing this long term for a relatively low cost, but then what about when it comes to market timing,
Does this mean it’s bad time to invest or is this a good time to invest, what do I think when it comes to this and this is probably one of the most common feedback that I get anytime I talk about stock market and thankfully this us a relatively easy one to end, the truth is that no one can accurately and consistently predict what the market is going to be doing in the short term it wasn’t even too much ling ago, that the market was crashing and everyone wanted to sell, everything and hold cash and buy back in at the dip but then two months later, we’re entirely received and take back what they said and they’re like “oh”
So with that said there has being hundreds if not dozens of studies that prove that time in the market beats timing the market to build wealth.