Index Funds are an easy way to get a diversified investment portfolio with great overall returns.
They are so good that Warren Buffett said when he passes away, he wants 90% of his trusts money invested into Index Funds that track the S&P 500.
This is a detailed guide. Read to the end to learn this powerful investing strategy that takes very little work and has great overall returns!
- Works anywhere 🌎
- How much will you make: 7% per year
- Difficulty: Easy
- Note: Long term strategy!
- Requirements: A brokerage account that lets you invest in USA markets
What Are Index Funds? Index Funds let you buy an entire portfolio of stocks all at once for very cheap. When you buy one index fund, you will own a small fraction of hundreds of companies.
For example, if you buy one share of “VOO” you will own a tiny fraction of the 500 biggest publicly traded companies in the USA (aka the S&P 500). These companies include Apple, Amazon, Google, and so on.
This means you’re investing in the market to do well as a whole over time rather than bet on one company. So if 1 company fails, it doesn’t really hurt because you have 499 other companies you’re invested in.
Related reads:Learn how to get free stocks! (USA redients only)
Why Are Index Funds So Good? 👍These are the many reasons to consider Index Funds:
- Index funds make more money. Over 90% of professional investors cannot outperform index funds!
- 7% historical returns (adjusted for inflation) if you buy the S&P 500
- It’s the easiest, most proven long term investing strategy with the best overall returns
- It’s diversified. You can own the top 500 publicly traded companies in the USA all at once
- It takes no skill, anyone can do it
- Index funds have low fees. They are usually around 0.03%
- They are automatically rebalanced which saves you time
If you want a crash course about this topic, watch this great video by Graham Stephan:
How Much Do You Make?If you buy Index Funds linked to the S&P 500 you will make 7% per year on average adjusted for inflation.
This strategy works as long as you are investing long term (many years).
The market goes up and down in the short term, but over the long run it has always gone up 7% on average throughout history.
If you try to pick individual stocks instead, most people will lose money. Studies show 90% of professionals can’t outperform index funds. That number must be way worse for the average investor like you and me.
If you buy the Index Funds instead, it’s unlikely to lose money if you hold long term.
Who Is It For?You should only invest in index funds if:
- You have money to invest that you won’t need in the short term
- You want to invest and build wealth long term
- You have your emergency fund and personal expenses covered
If you check these boxes Index Funds are good for all investors. Even beginners can do it which makes it super powerful!
Remember, the market goes up and down in the short term so make sure you absolutely won’t need this money for minimum 3-5 years.
👎 What Are The Cons?
- This is a long term wealth builder. Not get rich quick!
- In order to invest you need to be making money from a job or business. Don’t invest in this if you only have $100 to your name
- You need to consistently invest (every week or every month) if you want substantial wealth in the future
- You can make higher returns with individual stocks (but you have to be extremely good at it)
How Do You Buy Index Funds?To buy Index Funds you need to open brokerage account. There are MANY brokerages that come in all shapes and sizes.
If you’re a beginner, I recommend one that’s user friendly, trustworthy and has no commission fees. Here are some of the popular ones by country:
- 🇺🇸 Webull – New members get 2 free stocks worth up to $1650
- 🇨🇦 WealthSimple Trade – Bonus $10 free when you buy $100 worth of stocks/ETFs
- 🇮🇳 Zerodha – India’s most popular broker
- 🇦🇺 CMC – Australia’s best overall broker
The Strategy1. Open a trustworthy brokerage account and connect your bank account so you can deposit money.2. Buy ETFs linked to the S&P500 such as VOO or SPY. This is how you will get a 7% return long term.
3. Invest consistently whether it’s every week or every month this is crucial to build a large portfolio. Do this for decades and you’ll do very well. I recommend setting up preauthorized deposit so it’s automatic.
4. Invest smart. Don’t invest money unless you have an emergency fund and you won’t need this money for many years.
The Bottom LineIndex Fund investing is low maintenance, reliable and has great overall returns. It is the best strategy for 95% of people.
Lastly, I want you to keep in mind investing is what to do once you already have money. It’s not the best way to build wealth. If you don’t have much money, look into starting a business or learning high paying skills first.
Ready to Learn More?Check out our book “Investing for Beginners.“
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