I’m not afraid. I was born to do this. -Joan of Arc
Nice work! You’ve chosen an account to start with! (If you haven’t, go back and check out How to Start: Part 1) Now keep reading to learn how to put your money to work for you with a simple tool called index funds. You’ve totally got this!
Early in life I learned that stocks are a scary, uncertain, high-risk gamble. In my early 30’s I started reading books and quickly realized two things: 1. The stock market is an incredible wealth building tool, and 2. It’s 100% possible and easy for regular folks to manage their own investments. Since I started learning about this stuff, David and I haven’t looked back and now have a retirement future that we are more than excited about.
Buying and selling individual stocks based on how and when you predict their value will change is extremely risky. Many, many people make loads of money telling people that they can make those predictions for them and get high returns, but the truth is that in the vast majority of cases they don’t outperform the market as a whole. The other truth is that the fees they charge for this average or below-average advice dramatically affect the returns you could be earning if that fee money was invested instead.
The good news is that you can do your own investing with very little risk and a fairly stable return quite easily. Yes, that’s what I said. Investing in the stock market can be easy, you can dial in a level of risk that’s comfortable for you, and you can make just as much and probably more money than you would if you paid someone else to do it for you. And here’s the best part: you’ll probably do better if you pay absolutely no attention to your accounts. We’re teachers, right? Who has time to watch stock prices?
A few words are key here: “low-cost index funds” and “buy and hold”. Here’s why loads of people, including me, use them to make our money work for us in the stock market:
- Index funds are passively managed. This means that math and data decide which companies you’re invested in. You’re not paying an actual person a high fee to decide which companies are in or out of the fund. Index funds are made up of companies in an already existing stock index, such as the S&P 500. So when the overall index that the fund is tracking goes up or down, so does the value of its shares.
- The index funds we’re talking about include many different stocks, so you’re not relying on a handful of companies to succeed in order for your money to succeed. The companies are included or removed from the fund based on the index, so you’re always invested in companies that are doing well enough to be part of the club.
- Index funds will save you ENORMOUS amounts of money. You do NOT need to pay a financial planner or advisor to do it for you! Seriously. The measure of how much an investment costs is called the expense ratio. Vanguard has rock-bottom expense ratios that have made them the leader in personal investing for decades. For example, let’s say you pay your financial advisor to invest a lump sum of $10,000 for 30 years at an expense ratio of 1.5% (which is a low estimate for most fees charged by advisors). Over 30 years those fees would cost you $110,237! Or you could go over to Vanguard and get a fantastic index fund investment with a 0.04% expense ratio and only pay $3,418 over 30 years. It pays to do it yourself. Literally!
- The stock market has always gone up over time. When you take the long view and look at returns across decades, investing in index funds makes sense in nearly every scenario. Yes, there are down years and even major drops, but if you’re invested in index funds that track the overall market, it’s HIGHLY likely that you’ll come out WAY ahead when you’re ready to retire. The trick is to buy and hold through those ups and downs and let the math work in your favor.
- This is a nutshell version of this information because I know you’re busy. But if you want to know more details, please read The Simple Path to Wealth, by J.L. Collins. This book is one of the best I’ve read. It’s a fast read and it’s written by a pillar in the financial independence community. It’s available on Audible if that’s easier for you. You can also listen to the author, Jim Collins, on the ChooseFI Podcast, Episode 019.
So, now that you know why index funds are your best friend, which one should you buy? I’ll get into those nuts and bolts in the next article: How to Start Investing, Part 3.
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