Disclaimer: This is a very quick overview of the best investment method I have found. I’m sure in the coming weeks I will dig deeper into the rabbit hole of investing, but wanted to at least give you a direction in which to look as time in the market is usually more important than being 100% correct. As always I am available for questions. I also encourage reading JL Collins stock series which can be found here, and/or his book, “The Simple Path to Wealth”.
If you were to do a word association exercise with people concerning the word investing, my assumption based on conversations I have had would be you would hear, “confusing, overwhelming, scary, fear-inducing, stressful, difficult, etc.” If you were to ask people in the FI community I have a feeling you would hear, “easy, boring, etc.” I know those are my personal words to describe it. The surprising reason for this is that the majority of those in the FI community shoot for average when it comes to investing, and normally come out ahead. Sometimes average is not all that bad.
In 2006 Warren Buffet issued a $500,000 bet that an S&P Index Fund could beat a collection of hedge funds over a 10 year period after fees are deducted. One would think that hedge fund managers would have jumped at this bet as they regularly proclaim how investing with them you can earn above average returns, aka you can beat the return of the market. I find it telling that it took until mid 2007 for Buffet to find a hedge fund manager willing to take his bet. As Buffet himself wrote in his 2016 letter to Berkshire Hathaway Shareholders, “I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line? What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge.” At the end of the 10 year period the index fund returned an average of 7.1%, whereas the hedge funds after fees returned an average of 2.2%.
If the above is not enough to speak to the power of index funds, Buffet has instructed that upon his death 90% of his remaining cash after fulfilling his charitable wishes should be placed into an S&P index fund for his wife. Buffet as one of the greatest stock pickers of all time could have laid out a complex plan to vet companies and what metrics to examine to care for his family, but instead has opted to have his cash placed in an index fund. He trusts the funds enough for his family.
So, what are these funds and why are they so great? We know the fund that Buffet invested in for his bet is Vanguard’s S&P 500 Admiral fund (VFIAX). This fund owns a piece of the 500 companies that make up the S&P 500. The fund that you hear most recommend from the FI community is the Total Stock Market Index Fund Admiral Shares (VTSAX) which tracks the entire 3,000 plus stocks in the market. In other words these funds do not aim to beat these indexes, but aim to match their returns.
There are two huge benefits to the above funds. The first is that they are low cost. The problem with investing in most mutual funds or hedge funds as mentioned above is the fees. While it is possible that a hedge fund may beat the market, though this is rare, even when they beat the market they have to do so by leaps and bounds to return better than the market after their fees. The other benefit is that they are passive investments. These funds are not actively traded and managed, with someone trying to pick the next big thing, they just track the markets. This leads to the boring/average quality of them, but is also what makes them great and low cost.
Technology has also made investing simple. Numerous robo-advisor companies have popped up that take care of investing, rebalancing your portfolio, and taking advantage of things like tax loss harvesting. I debated between opening a Vanguard account or going with the robo-advisor company Betterment for my investments as I learned about index funds. I chose Betterment due to the tax loss harvesting aspect, as I need all the help on my taxes that I can get, but truthfully am not fully sold on it and am debating also opening a Vanguard account and tracking the returns of each to see which one is best.
The great thing though about choosing low cost passive investment methods, whether it be doing it yourself or through a robo-advisor, is you can reap the benefits of compound interest while examining other investment methods. As I mentioned above I may open a Vanguard account to see how those returns compare to my Betterment account, but I am still reaping the benefits of the Betterment account, currently returning 9%, while investigating other options.
*P.S. If you decide to open your own Betterment account I have a referral code I would love to send you.
**Image by Ahmad Ardity from Pixabay
