Investing for many people is a big unknown, with many questions that seem too hard to answer. And for others, they may make a few investments in individual stocks and see a solid return and start getting overconfident in their investing ability, and start making some bad investments, or try and time the market, or chase penny stocks in pump-and-dump schemes.
The problem with the first scenario is that it leads to inaction, which if you’ve read some of my other columns you’ll know that inaction keeps you on a treadmill going nowhere. The problem with the second is you have a great risk of either middling returns, or potentially losing significant sums of money.
If you are just starting out investing or even if you’ve been investing for years, low-cost index funds are a great way to invest. This is a strategy that has been recommended even by an investing legend like Warren Buffett. One of the best low-cost index funds and easiest to find at a brokerage is a fund that tracks the S&P 500.
The reason that I, and several others, recommend this investment strategy is that by taking a simplistic approach to investing you eliminate the analysis paralysis that keeps you from starting investing. You are simply investing in an index that tracks the overall market. Over the past 10 years if you had sat out the market or taken your money out during the Great Recession you would’ve missed out on a significant increase in your investments (see chart below of the S&P 500 over the past ten years).
According to a 2017 DALBAR study covering investor behavior, they found that over the 10 year period ending 12/31/2017, the average equity investor underperformed the S&P 500, with the average investor earning a return of 5.29% compared to the S&P 500 return of 7.2% for the same time period. Part of the difference is driven by the emotional side of many investors who may exit the market as it is on its way down and then re-enter to late to capture all the subsequent increases.
In order to get started in this simplistic investing approach, you need to take the following simple steps:
- Open an investment account (assuming you don’t already have one you love)
- Transfer funds into the investment account that you wish to invest (this should be money that is above and beyond your emergency fund)
- Select and purchase the index fund that fits your current life circumstance (below are some recommended funds that I’d give to my kids to invest in for the long term)
- Vanguard 50o Index Fund VFIAX (Admiral Shares) – This fund has returned 10.85% over the past 10 years and 6.45% since inception back in November of 2000. This fund has a $10k minimum investment, but you find alternatives that have lower minimums like VFINX which is the Investor Class and has a minimum investment of $3k. And with an even lower minimum is their ETF (Exchange Traded Fund) version VOO, which has a minimum investment of the price of 1 share of the ETF (currently at approximately $267 a share). All 3 of the options noted above will allow you to invest in an index of the S&P 500.
- Fidelity 500 Index Fund FUSEX – This fund has similar returns to the Vanguard fund noted above. Fidelity also offers an ETF version under the ticker symbol IVV which tracks the S&P 500 similar to the Vanguard options above.
Where to Trade
There are many different brokerages where you can open an account and purchase index funds through. The one I recommend is TD Ameritrade, which is my main brokerage account. They have low-cost trades and have some great sign on offers.
The key is to start
Sitting on the sidelines of the market has cost a lot of investors money over the past decade. And while the market won’t always go up, one of the best strategies is to buy and hold and not let emotions take over when the market is swinging up or down. While there is a lot more you can do for a more complete investing strategy, this is a simple option so that you get started.