﻿I’m at the Gold’s Gym weight room trying to fit in with all the weightlifters.
In my airpod, I’m listening to one of my favorite autobiographies - Total Recall
by Arnold Schwarzenegger. I may not agree with all his life decisions, but his rise from a poor
Austrian boy to the Governor of California still amazes me. And in my ear, the life
principles of success motivates me to workout. Don’t settle for average. Strive to be the best.
Don’t just stand there. Take action. Do something. If you don’t know how to do something, hire an
expert. These principles are commonly preached by many highly accomplished and successful people.
However, would you be shocked that if I was to tell you, when it comes to investing,
applying these principles can actually leave you poorer? Hi, if you are new to the channel,
my name is Tae from Financial Tortoise - a channel dedicated to helping the Sandwich Generation
Master Money and achieve Financial Security. And before I go on, if you have yet to download your
free copy of “Sandwich Generation’s Guide to Financial Security - 10 Steps to Securing Your
Family’s Financial Future!” please go to my website at financialtortoise.com and do so.
I send out weekly newsletters with other great tips on mastering your money and I wouldn’t want
you to miss them. The principles of successful investing defies normal principles of life.
We’ve been taught growing up that we shouldn’t settle for average. That we should strive to
be the best that we can be. But as an investor, interestingly you can be well above average by
settling for index funds “average” returns. We’ve been taught that in times of crisis,
we should be action oriented. Don’t just stand there. Make a decision. But ironically trying to
fix a perceived investment crisis by taking more action is a recipe for poor returns. We’ve been
taught that if you don’t understand something, you should hire an expert. An investment advisor
to help you manage your money. But in the case of investing, oftentimes you will get much less than
you pay for. And the reason why so many common successful life principles don’t apply to the
world of investing is very simple. The short-run performance of the stock market is random,
unpredictable and for most people, emotionally traumatizing. There are countless studies that
compare the S&P 500 or Total Market Index Fund versus Actively Managed Mutual funds
and results show again and again the low cost index funds outperforming actively managed funds.
And most often, these underperformance are due to investor or fund manager behavior of either
marketing timing or pursuit of chasing hot funds. The notion that someone knows how the stock market
or any given stock is going to perform in the next few weeks, months or years is oftentimes based on
unfortunate self-delusion. There are more than 200 years of US stock market history and the long-term
trend is up. And in the long-run, the stock market performance has been rather consistent.
But in contrast to the long-term returns, short-term returns and movement of the market
is quite unpredictable and volatile. I firmly believe that stocks over the long-run offer one
of the greatest potential returns for the average investors like you and I. But in the short-run,
the roller coaster rides can be quite a nightmare for those who don’t understand
the basic principles of the market and lack a pragmatic plan to cope with it. The bottom
line is that Investing has a whole new set of rules, and if we want to be successful, we must
learn to play by these new rules. New rules that might make us feel like losers in comparison to
the common successful principles of life we have been conditioned by. Introducing Index Investing.
Where it pays to be a loser. Index investing on the surface seems like an investment strategy
that would be perfect for my special friend, Andy Dweir. It takes very little investing knowledge.
Almost no extra time or effort. And no special skills whatsoever. Yet, it outperforms more than
80% of all investors. Maybe even more. It frees you up to spend your time on whatever else you
want to be doing instead of looking at the stock market or investing news. And while you are doing
more important things with your life, your investment compounds and grows on autopilot.
It really is about as difficult as brushing your teeth and takes as much as time going
to the dentist once a year. And trust me, I’m not exaggerating. I’m an index investor,
and if I can do it. I’m quite sure you can do it too. And if you agree with the notion that
you’d like to be paid to be a loser, do me a quick favor and hit that like button. It
really helps with the YouTube algorithm and allows videos like this to be shared with more people.
Index investing in a nutshell is this. Instead of hiring an expert or spending a lot of your
brain bandwidth trying to select the right stocks or actively managed mutual funds,
you just invest in a good low cost index fund like VTSAX and you essentially forget about it.
An index fund attempts to match the return of the segment of the market that it is indexing.
An S&P 500 Index Fund matches the 500 largest publicly traded companies in the United States.
A Total Stock Market Index Fund replicates all the publicly traded companies in the United States.
A Total International Index replicates a broad cross-section of thousands of reputable
international stocks. With a small management fee for each fund, ranging from 0.04% to 0.11%,
you can be invested in an index fund within minutes. And indexing in many expert’s opinions is
really one of the best ways to invest because they have and will continue to outperform the thousands
of actively managed funds over a long period of time. One of the reasons why index investing is so
effective is that index funds by nature are highly diversified and less risky. Diversification is the
key to reducing investment risk. The fastest way to get rich overnight is to own the next
Netflix. But the fastest way to lose all your money is to own the next Blockbusters.
To know what companies will do well or not do well is nearly impossible. However, you don’t
need to have a magic ball in order to get healthy returns on your investment. If you buy an S&P 500
or Total Stock Market Index Fund, your investment is highly diversified and its performance will
match that of the companies that the fund is indexing. Is it possible to lose all your money?
Ofcourse, but that means that all the major US companies have essentially been destroyed
and in that case, the value of your investment portfolio will be the least of your worries.
Another reason why Index investing is so effective is its low operating cost. Actively managed
funds are known to charge anywhere between 1 to 2 percent expense ratios. This means that between 1
to 2 percent of your investment is deducted each year to pay the fund manager to run the fund.
On a $100,000 portfolio, that comes out to $1K to $2K annually. By contrast, index funds are much
cheaper given no person is actually managing the fund’s performance. There isn’t a person deciding
which funds to buy or sell or when to buy or sell them. The fund simply replicates the index. As a
result, most index funds have an expense ratio well under 0.1%. VTSAX and VFIAX, Vanguard’s
Total Stock Market Index Fund and Vanguard's S&P 500 Index Fund have respective expense ratios of
0.04%. On a $100,000 portfolio, this comes out to $40 annually. I’ll take a $40 expense over $2,000
any day. And the real power of low operating cost really comes to play when you incorporate
compounding into the formula. These expense ratios can net you or cost you hundreds of thousands of
dollars over a period of 10 to 20 years. Cost matters and the king of low cost are passively
managed index funds. But my favorite reason why index funds are so effective is that there really
isn’t a need to hire an investment manager to monitor your portfolio. I firmly believe that
with enough right information, any of you can effectively manage your own portfolio. When you
have an investment manager, they take a huge chunk of your portfolio to manage your money for you.
This is real money that is going into someone else’s pocket instead of staying and compounding
in your account. Some argue that there are really good investment managers whose performance is
worth the cost. Peter Lynch, managed the Fidelity Magellian fund from 1978 to 1990 and posted an
average annual return of 29%. However, such individuals are so rare that some investment
scholars attribute their consistent performance to luck rather than skill. Just like stocks,
many of yesterday’s superstar managers can quickly turn to today’s underperformers. And how can you
effectively identify who tomorrow’s superstar will be? This too unfortunately is a futile pursuit.
The bottom line is that with index funds, who’s managing the fund is not an issue. Index funds
only track the index. Nothing more. Nothing less. We won’t know what the future will hold.
However, what is sure is that when it comes to investing, more activity, more timing and
more supposed ‘expert’ advice won’t get us better returns. When it comes to investing,
be ok with being a loser. Thank you guys for watching and if you want to learn more about
index funds and my “5 best Vanguard funds to buy and hold forever.” checkout my video here.