- I talk about index fund investing a lot on this channel,
it has been my favorite way to invest for years
because of one simple reason.
It just works for basically everyone.
Oh, and they're simple to invest in and extremely cheap
and outperform most active investors
and are pretty much dummy proof.
Sounds a little bit too good to be true, right?
Except it's not.
But it turns out, a lot of people don't understand them.
I've been getting a ton of questions
about what an index fund is, how they work,
and many other questions.
So in this video, I'm gonna go through
everything you need to know about index fund investing.
By the end of this video, you'll really understand
why they're one of the best investments
that you can put your money into.
I personally prefer using Vanguard index funds.
So that's what I'm going to be using for all of my examples
throughout this video.
Now, there's a ton of other ones that are out there
that are just as good,
so feel free to use those ones if you'd like.
No, this video is not sponsored by Vanguard.
I just love them that much
to the point where if Vanguard was a woman,
I would marry her in a heartbeat.
Hey, I'm Jarrad with an A.
And on this channel, we talk about all things
personal finance, investing,
and we try to have a little bit of fun in the process.
Quick disclaimer,
nothing I say should be taken as financial advice.
Do your own research before investing your money,
instead of listening
to a random guy like me on the internet.
An index fund is a way for you to invest
in hundreds or even thousands of companies
by purchasing one share of that index fund.
It wouldn't be like you and me going to a horse racing track
where there's 3,000 horses racing at the exact same time.
Now each horse in this race
would represent one publicly traded company
on the stock market.
Each of those 3,000 horses is vastly different
and will perform very differently during the race
based on everything that went into the training
of that horse leading up to the race.
They've each been on different diets,
they've trained completely differently,
they've trained in different climates,
they're on different performance supplements,
some are rookies, some are veterans,
some have been winners in the past,
some have been losers in the past.
And the list goes on for what makes them different.
Now you and I wanna bet some money
so that we can go home winners.
Being able to brag to all of our friends
that we won money is very important,
but we need to make sure that we pick the right horse.
The top 1,000 horses who cross the finish line
will win you money.
First place will win you the most money,
second place a little less than that,
third place, a little less than that and so on.
The horse that finishes in place 1,000
will still win money but very little.
Instead of trying to guess
which horses will finish in the top 1,000
by betting your money on a couple of different horses,
you decide to place a bet on every single horse in the race.
Now this is going to increase your chances
of leaving the racetrack with money in your pocket.
This is essentially what you're doing
when you invest in an index fund.
It's a way for you to own a piece
of hundreds or thousands of stock
within a specific index fund by purchasing one share.
Yes, you're going to be placing a bet
on some losers within the group,
but the money you win
from placing your bets on the winning horses
will outweigh the money lost on those losing horses.
It's like saying
instead of trying to find the needle in a haystack,
why not just buy the whole haystack and be done with it?
Do me a huge favor and Hulk smash that thumbs up button
if you're enjoying this free content
that I put together just for you.
It really helps support myself and this channel.
But we have to keep in mind
that just deciding that you're going to invest
in an index fund is only the beginning of your decision
to become this type of investor.
Each index fund out there has a different goal
and the goal of that index fund
will determine which type of investments are held within it.
For example, if you want to invest in real estate,
then there's real estate index funds out there like VNQ
that holds 180 different stocks for the price of $73.
If you want to invest in international stocks,
then Vanguard offers a total international index fund
that spreads your money among 7,000 different stocks
for the low price of $45.
They even take it one step further
and offer a total world index fund which holds 8,000 stocks
from all over this round earth that we live on.
Wait, I mean flat earth.
No, I mean round earth.
Okay, now I'm confused.
There's even bond index funds as well like BND,
which holds a bunch of different bonds.
If you're from the United States
and you wanna keep it in the family,
then there's the Vanguard S&P 500,
which holds stocks of the 500 largest companies
in the United States.
Think companies like Microsoft, Amazon, Apple, Facebook,
Johnson and Johnson and Visa.
And we of course, can't forget my personal favorite,
It holds a special place in my heart,
which is the Vanguard Total Stock Market Index Fund,
which holds over 3,500 different stocks,
that range from large, mid and small cap companies.
One thing to keep in mind is that most of these index funds
are fully invested in stocks.
If you're someone who wants to have a certain percentage
of your portfolio in bonds as well,
then you'll have to add that separately.
For example, you might really like VTI,
the Vanguard Total Stock Market Index Fund,
but you also want to have some exposure to bonds as well.
Because of this, you might have 80% in VTI, and 20% in BND.
If you are someone who also wants to have a little exposure
to international funds as well,
then you might choose to invest
based on the three fund portfolio strategy.
This is where you only hold three index funds
that spreads your risk across United States companies,
international companies and bonds as well.
An example of a three fund portfolio might look like
70% in VTI, 20% in VXUS
and 10% in BND.
This is just an example
and should not be considered investment advice by any means.
The way that you invest in an index fund
is by first choosing
which investing platform you want to use.
There's a ton of good ones out there for you to pick from.
To help you out with this in the description,
I'll link a video that I made
on the top five investing platforms out there.
I personally prefer using M1 Finance
for the majority of my investing
since they fit my buy and hold passive investing style.
I'll have a link to check them out
in the description of this video.
If you do use that link,
then it does help support this channel and me
at no extra cost to you.
No pressure though.
After you pick an investing platform,
then you'll need to choose the type of investment account
that you'd like to start investing into.
Is this going to be an IRA, 401k, 403b
or taxable investment account.
I made a whole video to help you out with this as well,
which I'll link in the description of the video
and somewhere above my head.
Some people might say that index fund investing
isn't for everyone,
but in my opinion
and based on countless financial studies out there,
some sort of index funds
should be a part of 99% of people's investment portfolios.
One of the biggest advantages of investing in index funds
is the fact that they're extremely easy
to invest in and manage.
You don't have to worry about doing research
on each individual company
publicly traded on the stock market
to determine which ones you should buy
or how many shares you should buy as well.
The percentage of a company held within an index fund
is already predetermined for you.
All you do is deposit your money
into your brokerage account,
purchase how many shares you want,
and the busy work of buying each individual company
is all handled for you.
This is such a big selling point
for the average person out there
who wants their money to grow,
but isn't big into spending their time
nerding out on the individual stocks to purchase.
I'm someone who is absolutely obsessed
with money, personal finance and investing.
I would talk about this stuff for hours and hours
and I kind of do mainly to myself more often than not,
but I have zero interest
in going through the whole dog and pony show
of digging into the balance sheets of every company
that I wanna put money into.
Even though I know how to evaluate a stock before buying it,
I still don't trust that I'll be able
to set my natural human emotions aside
for long enough to make a smart purchase.
And believe it or not, my returns will most likely be higher
since I've opted to leave the stock picking process
up to my index funds.
That's because index funds are extremely effective
when it comes to the returns that you would expect.
To determine if they're effective or not,
you'd need to look at what your returns would be
if you had invested in something else
like picking individual stocks on your own,
or investing in an actively managed mutual fund.
Just so we're on the same page
an actively managed mutual fund
would be a fund that holds a bunch of different stocks,
kind of like an index fund.
The biggest difference
between an index fund and a mutual fund
is that the mutual fund has a fund manager
that is actively picking
which stocks to buy, which stocks to sell,
how often they do this
and how much they're spending on each stock.
An index fund also has a fund manager of course,
but his or her role is a lot more hands off.
It's not up to that fund manager
as to which stocks to buy, sell
and how often to do these two things.
These decisions are already determined
based on the particular index that that index fund attracts.
For example, an index fund like VOO tracks the S&P 500.
Therefore, it's only going to hold the exact same
500 companies that the S&P 500 holds.
If we look at the returns
from an actively managed mutual fund,
their track record isn't very good
when you compare to an index fund.
Believe it or not, the returns actually get even worse
as time goes on.
Based on a report from last year,
64% of actively managed funds,
underperformed in S&P 500 index after just one year.
After 10 years, that number shot up to 85%.
And after 15 years,
91% of them didn't outperform a standard S&P 500 index.
That means that if you're a long term investor
and you decided to put your money
into an actively managed mutual fund,
then there'd be a less than 10% chance,
you'd pick the fund
that would actually outperform an S&P 500 index.
You'd have better odds at a higher return
if you went to a roulette table in Vegas
and put all of your money on black,
at least that way, you'd have a 47.4% chance
of doubling your money.
By the way, don't do this, please, don't do this.
The success rate of those mutual funds
is actually worse than what I showed you
due to something called survivorship bias.
The reason for that is because as time goes on,
if a mutual fund has such horrible returns,
then they just close the fund down
and those mutual funds that have been shut down
aren't counted in the numbers.
So you should technically expect that the 9% success rate
is a lot lower.
One of the reasons an index fund
can outperform an actively managed mutual fund
is because an index fund is very cheap to own.
It would be like you paying less money
for a better quality product.
The more money you're charged in fees,
the more those fees eat away your return over time.
Index funds are known for having the lowest fees out there,
aka expense ratios.
The Vanguard Total Stock Market Index Fund, VTI,
only charges 0.03%, which is one of the lowest out there.
If we look at an actively managed mutual fund
like this one for American funds,
then you can see not only the insane expense ratios
you are charged,
but also the other fees that you're charged as well.
A 1% yearly fee might not seem like a lot on the surface,
but if we look at how much it costs you over time,
it kind of makes you sick to your stomach.
If you were charged a 1% fee
and you invested $10,000 per year,
then after 40 years of investing,
you'd have paid over $500,000 in fees
and your returns would have been a lot lower.
You could have bought seven Tesla Model S's
and still had $30,000 left over to travel the world
if you instead decided to invest your money
into a low cost index fund
that only charged you 0.03%, like VTI.
Index funds are known for being cheaper to own
because they're able to keep
the cost of running it very low.
Since the goal of which investments to hold
is already predetermined,
then you don't need to pay
a whole bunch of analysts and other people
to manage that fund.
This cost savings is passed on to you the investor.
Over the past two years,
we've seen Vanguard lowering the expense ratios
of all of their index funds whenever they can.
I've seen VTI
go from 0.05% expense ratio in 2017
to 0.03
in 2020.
Probably my favorite part about index fund investing
is that it is insanely easy and very difficult to screw up.
Once you pick which index funds you want to invest in
and the percentage of money you want to go towards each one
there's nothing more that you need to do
except start putting money into your account to be invested.
Yes, you wanna log in at least twice per year
to check up on things
but other than that the process should be pretty automated.
For beginner investors,
or anyone who doesn't feel comfortable investing yet,
I always tell them to just put their money
into an index fund while they learn more.
The longer you're sitting on cash that's not invested,
the more money that you're losing from not having that money
in the market working for you.
You're always better off
getting your money invested as soon as possible
as opposed to waiting until you know
everything there is to know about investing in general.
And index funds are a great way to do that.
You'll have a higher likelihood
of regretting picking individual stocks
than you will invest in an index fund.
Watch this top video next,
where I show you my personal investment portfolio
or the bottom one where I show you the roadmap
for how you should invest your money.
Check out the description for more resources and playlists
to help you out with all of your personal finance
and investing needs.
Make sure to Hulk smash that thumbs up button.
I'll see you in the next one friends, adios.