I’ve read too many articles and received too many texts from friends with similar pitches… Whether it’s a cutting edge tech company or a pharmaceutical company on the verge of FDA approval for a lifesaving drug; typically these types of investments never yield the expected returns.
When it comes to my retirement investments, I take a more prudent approach. I’m not one to sacrifice by diligently saving and then gamble on some high risk, high reward investments. Remember, investing is not gambling. At the end of the day, I’d rather gradually accumulate wealth and watch my net worth increase over time by using index funds. Let me tell you why index investing is sexy.
Proven Returns with Less Risk
One of my all-time favorite investors, Warren Buffet, said it best when he stated that by “periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals”.
That’s a lesson that took me a while. I made plenty of financial mistakes in my 20’s. One of which was convincing myself that I was the next great stock picker. What I soon realized is that index investing is sexy as hell.
In fact, the Vanguard S&P 500 index fund has outperformed 90% of actively managed mutual funds over the past three and five years. That means that many know-nothing investors sat on their couch and saw returns that exceeded wall street professionals that spent their year actively managing investments.
Index funds also present less risk (especially over stock picking). If you invest in an S&P 500 index, you essentially own the 500 largest U.S. companies across all industries. Pretty quick way to diversify your portfolio with one investment huh?
Simply the best part of index investing is that it costs you barely anything to own an index fund. Since you don’t have an active fund manager managing the investments as you would for a mutual fund; the costs are extremely low.
Remember, you’ll pay fund expenses whether the market is going up or going down. It’s the one piece of your overall return that you can control 100%. I use Fidelity for index investing, so most of my investments are selected from their Spartan Index Funds. The beauty is that the expense ratio’s start at .05%. That means that I pay about $.50 for every $1,000 invested. Compare that to some of the actively managed mutual funds that have anywhere from 1-2% expense ratios or $10-20 for every $1,000 invested.
Over time, investment expenses can eat up your returns. Remember, investing is a long-term game. If you sacrifice even 1% of your returns over the long haul, it will have a huge impact on your nest egg in the end.
Simple and Worry Free
Many people refer to index investing as ‘Passive Investing’. It’s so simple to set up your portfolio and fully diversify that it takes the worry out of stock picking or actively managed funds.
I can honestly say that since I started indexing, I no longer worry about whether the market is going up or down. I sit back and continue to invest my contributions according to my asset allocation across multiple index funds.
No matter what company you use; Fidelity, Vanguard, Charles Schwab, etc. There will be plenty of index funds offered. The beauty is that you don’t have to extensively research the various funds. Select multiple asset classes (large cap, mid cap, small cap, international, fixed income, etc.) and know that you’re paying low fees and establishing a balanced and diversified retirement portfolio.
Take a look at how I invest our retirement portfolio here. Most of the investments in this breakdown are through Fidelity Spartan Index Funds.
Just to be clear, I’m not saying that there isn’t a place for active management. In fact, I do own some actively managed mutual funds and I continue to pick certain stocks that I feel have great upside. I’m just saying that index investing can be pretty sexy. Especially for the average investor. Index investing seems to get a bad rap. Like it’s not cool to reap great returns with passive investments.
Who knows? Maybe my affinity toward indexing is because in a weird way, I consider myself the index fund of CPA’s. On the surface, people think that I’m a boring finance nerd… but little do they know… I’m super sexy.
photo cred: Philippe Put