You probably heard that the best investing strategy is just to throw your money into
an index fund and let it grow it until you retire and with an average growth of 8 or
10 percent annually.
With the power of compounding, you will be doing great by the the time you retire.
But no one really talks about how to do that, how to invest in S&P500,?what stocks you have
to buy to do that?
So here in this video, we will answer that question.
Before we figure out how to invest in vanguard index funds or the S&P500, we have to understand
a few key concepts, what is an ETF?
How do mutual funds work?
And what kind of ETFs you have to buy to get an average rate of 8 percent annually?
ETF - The Greatest Financial Innovation
An ETF or An exchange-traded fund is a security that includes within itself multiple other
securities such as stocks, bonds, real estate.
It's basically a financial management company that takes investors money and invests them
in certain types of assets, but at the same time, their stocks are traded in the stock
market like any other publicly-traded company.
It's a great way to diversity your investment portfolio.
ETFs usually track a particular index.
The most famous ETF type you probably heard about is the one that tracks S&P500.
S&P500 is a stock market index that measures the stock performance of 500 large companies
listed on stock exchanges in the United States.
There are around 3700 publicly traded companies in the US alone.
So as an investor, you have a pretty big choice.
However, it's not easy to analyze so many companies and find out what are the best and,
at the same time, the safest investment.
That's where S&P500 comes into the picture.
It filters the best and safest stocks out of this basket.
There are certain criteria that a company needs to meet in order to join the S&P500
such as the company should have at least 8.2 billion dollars of market cap, most of its
shares should be in the public's hands, the company should be in the stock market for
at least a year and many other criteria.
Even a company like Tesla, with its over 300 billion dollar valuation, couldn't join the
index.
But that doesn't mean that every company in the index fund is going to do great in the
long run, but since they are the largest 500 companies in the country, most of them, in
the long run, are going to grow at different rates and judging by historical data, since
inception in 1926, it has been growing approximately at 9.8% annually, or 6% after inflation; however,
there were several years where the index declined over 30% during crises.
The ten largest S&P500 companies account for 26 percent of the index, companies such as
Apple, Microsoft, Berkshire, Alphabet, Johnson and Johnson and a few others (Amazon, Visa
Inc., Procter & Gamble and JPMorgan Chase, Facebook).
If you realized that at least half of them are tech companies, so if they suddenly rise
for one reason or another, they will have massive influence over the market and drag
with them the rest of the market, but on the other side, if they fall, the entire market
could be down just because tech companies aren't doing great.
2.
Mutual Funds - Let The Experts Manage Your Money
A mutual fund is similar in many ways to an ETF but functions in a slightly different
way.
Instead of passively investing in a certain index or an industry.
Managers at a mutual fund strive to beat the market by at least a small margin.
So before picking up a company, they would analyze their financial statements and try
to invest only in companies they believe would do the best.
Investing in a mutual fund is like hiring a bunch of financial experts who will choose
where to invest your money in.
But that doesn't come at a cheap price.
Mutual funds usually charge a percentage for their hard work to manage your money which
is typically between 0.5% to 0.75%.
Anything higher than that most probably doesn't worth it.
One percent might not seem like a lot of money if you are investing a thousand dollars, but
if your portfolio is around a million dollars, then that's at least a 10 thousand dollars
difference.
If that's the case, why would anyone invest in a mutual fund?
Well, you see, when you have a huge portflio, lets say a hundred million dollars, beating
the market even by a small margin like 1 percent is a lot of money because that will equal
to one million dollar, enough to provide you with a luxuriouse life for the entire year.
Imagine if they beat the market by two or 3 percent, the difference would be massive.
3.
Vanguard - A convenient Way To Invest
So, the question is, where do you find ETFs or Mutual funds to invest in?
And that's where Vanguard comes into the picture.
The Vanguard Group is a financial management company that has multiple ETFs and Mutual
funds under their wing, with about $6.2 trillion in global assets under management.
They have ETFs that invest in bonds or different industries or mega-cap indexes such as companies
that have a market cap of over 200 billion dollars like MGC (mega cap ETF).
You can scroll down through their website and find out the right ETF or a mutual fund
for you.
The famous ETF that invests in the top 500 US companies is VOO or S&P500 EFT that's currently
trading at around 313 dollars at the time of this script.
Its assets worth almost 596 billion dollars with its top 10 investments representing 30
percent of its asset since most of them are tech companies such as facebook, amazon, apple,
and so on, which also makes it a slightly risky investment in the short run that's why
Vanguard puts it at level 4 risk.
Tech companies are quite volatile which means, they quite often either significantly rise
as they are doing now or dramatically drop.
So if you are more of a short term investor, then it's probably not the best option for
you.
It makes more sense if you are looking for ten years or more.
By the way, it has an expense ratio, but its really low, 0.03 percent, that's insignificant.
This particular ETF was created back in 2010 and since its incepction, it had an average
rate of return of 14.7 percent.
That's incredibly high.
But you have to take into account that the last 10 years were the longest period of economic
expansion in the history of the US and tech companies that make up 30 percent of its portfolio
skyrocketed in the last years.
That's why it doesn't mean, its going to have the same rate of return for the next 10 years
since if this ETF was created 3 years earlier, back in 2007, numbers were complete different
because in 2008, we had a financial crisis the S&P500 was down by almost 50 percent.
And financial crises happen every now and then.
Another ETF worth taking note is VTI or Total stock market ETF.
It's huge, with assets reaching almost a trillion dollars (974 billion).
Maybe because it was created back in 2001.
So it has been around for almost 20 years; that's why it can give us a more accurate
rate of return, which has been historically 7.8 percent.
But Vanguard isn't the only financial management service company that provides such services.
The market is filled with them.
Fidelity Zero Total Market index fund is an ETF that's provided by Fidelity Investment
that also invests in S&P500 or Powershares QQQ by Invesco Capital management.
There are just so many of them that we can't cover here in this video.
The question that most of you are wondering about is
4.
How can I buy a Vanguard ETF Stock ?
To invest in one of these ETFs, all you need is a broker.
If you are in the US, you probably heard about Robinhood, for example.
This video is not sponsored by them, but because they are commission-free, it makes it easier
for many to start.
But they aren't the only, you can use any other broker.
But if you are not in the US, it doesn't matter, you can invest in these ETFs through almost
any broker in your city.
You just have to find one.
If you take a look at S&P500 rate of return for the last 90 years, it has been 9.8 percent.
That doesn't mean it's going to be like that forever, but 90 years is a long enough period
to assume that it will be around that number for the next few decades or so.
If you have a full-time job or a business, it doesn't make sense to you to sit down and
analyse stocks every single day and find good investments.
You might not even know how to do that.
That's what makes ETFs so attractive.
It's a convenient way to invest, but before you through your money into any of these index
funds, be sure to research more about them because you are risking your money.
Don't base your decision solely on a couple of videos you watched on YouTube but rather
understand the market.
And most importantly, make sure to give this video a thumbs up if you have enjoyed and
found it helpful most importantly.
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Thanks for watching and until next time.