Successful investing always starts with a goal!
Source: Napkin Finance
Investing is for everyone and it can help you reach your financial goals. And, you don’t have to try to pick the winners in the stock market to achieve long-term investing success.
When investing, you don’t have to have tons of money, trade a lot, or employ sophisticated strategies. A proven strategy is just doing the “boring” thing of determining an appropriate asset mix (of stocks, bonds, cash and real estate), owning well-diversified, passively managed index funds, avoiding the herd following tendency to “buy high / sell low,” and sticking with that asset mix over time can help you reach your financial goals.
Even billionaire investor Warren Buffett, the chairman and CEO of Berkshire Hathaway, has repeatedly recommended index funds. Buffett said at a shareholders’ conference, “In my view, for most people, the best thing to do is to own the S&P 500 index fund,”
An index fund is a professionally managed collection of stocks, bonds, or other investments that tries to match the returns of a specific index. They tend to:
- Pool money from a group of investors and then buy the individual stocks or other securities that make up a particular index. That model helps to reduce the associated costs that fund managers charge, compared to those funds where someone is actively strategizing which investments to include.
- Track the performance of a particular market benchmark, like the S&P 500 or the Dow Jones Industrial Average. They’re a form of passive investing, because they allow investors to buy a lot of assets at once and hold them for the long term.
- Offer instant diversification for a portfolio, which helps reduce risk. They also tend to be low-cost investment options, which is a big reason why they’re popular with investors.
While individual stock prices can fluctuate wildly, the broader index tends to go up over time — and with index funds, you don’t have to pick the winning stocks to benefit from the market’s overall gains.
Although all index funds track an index, according to Napkin Finance, what they invest in can vary widely:
- U.S. stocks—some index funds track a well-known U.S. index, like the S&P or the Dow.
- Global stocks—some try to essentially track the entire global stock market.
- A specific industry—some index funds focus only on tech or healthcare stocks or those of another industry.
- A particular region or country—there are index funds that track only investments in Japan, South America, or other regions.
- Bonds—some index funds try to track the whole bond market, while others focus on a specific slice.
- Alternatives—there are index funds that track oil, gold, real estate, and more.
Putting your money to work
There are some inherent risks that come with investing in the stock market, but investing also offers a higher rate of return than the interest rates you’ll earn on a savings account. The S&P 500, an index representing the 500 largest U.S. companies, has delivered average annual returns of almost 10% going back 90-plus years.
You don’t have to be an expert or professional investor to be successful. Index funds are a low cost and easy way to beef up the diversification of your portfolio. Additionally, they are relatively low cost and you don’t need a lot of index funds to achieve diversification.
Vanguard launched the first index fund for individual investors in 1976. Here are 3 reasons why they're still relevant to this day:
1) Keep more investment returns.
2) Pay less tax.
3) Easily create a diversified portfolio.https://t.co/6bJrGsJwVn— Vanguard (@Vanguard_Group) May 3, 2021
References: