I’d like to be very clear from the start. I am not a financial advisor. Nor am I licensed. And I am not a millionaire. Consider the following advice as if it were coming from a good friend. You should not just do what I recommend and understand nothing. Take my thoughts and consider them. Then do research on them. Then make the best decision for yourself and your family. Now, let’s talk about how to invest in an index fund.
Everyone thinks investing is so hard. But the truth is, investing is the easy part. The hard part is sacrificing today for a better tomorrow. (i.e. saving money) The hard part is realizing that no one cares as much about your money as you do. And the hard part is coming up with a plan and sticking to it.
Most of what I talk about on this site is how to save money. “Finding hidden savings in everyday expenses.” But here I wanted to discuss what I do with my money to grow it.
And let’s be clear from the start that this is not my personal advice, but the advice of the greatest investor of all time – Warren Buffett.
“The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.Warren Buffett
Invest in Index Funds
In the above quote, we get three pieces of advice from him. First, he recommends NOT to pick individual stocks. Second, he recommends buying a portfolio of all the large companies. This means index funds (portfolio of tons of different companies represented in one price) or exchange traded funds (look like stocks but underlying asset is a mutual fund). Finally, he recommends to “do it consistently”.
Many might overlook this last piece of advice – “do it consistently” but this is one of the most important pieces he gives us. Warren is telling us to invest using a strategy called dollar cost averaging as opposed to trying to time the market by purchasing all of our assets at one time. There are many reasons for this advice I am sure, but what’s obvious is he want’s us to get out of the mindset of timing the market and get into the consistency of a process around investing.
Investing Isn’t Hard
Warren Buffett’s advice here is why I believe investing isn’t hard. And anyone that tells you that you can’t do it on your own probably makes a living selling you that story. (Queue nasty comments from financial advisors here.)
I recommend cutting your own hair as a way to save money in the long term because early on in my life I realized that no one cares about my haircut as much as I do. So why leave it to other people?
Well, no one cares about your finances as much as you do, so why are we leaving it to other people? Same logic, but very different importance of outcomes.
Investing is easy if we follow the advice of probably the worlds most successful investor of all time.
Warren Buffett’s Investing Advice for Most People
- Stop trying to pick stocks.
- Stop trying to time the market.
- Invest in low cost index fund that tracks the S&P 500.
- Do it consistently with dollar cost averaging.
How to Invest in an Index Fund
Let me tell you exactly how my investing strategy works to demonstrate how simple this whole thing can be.
I have an account with Vanguard which automatically deducts $X from my checking account each week and invests in VFIAX which is a fund provided by Vanguard that tracks the S&P 500 index. This fund charges me 0.04% per year which is 96% lower than average expense ratios with similar holdings.
And, that’s it!
That’s my investing strategy for index funds. I have other forms of investments, but this is my bread and butter. And it’s totally automated each week so I never have to lift a finger. Plus, this checks the box of Warren Buffett’s advice above. By investing weekly, I am using Dollar Cost Averaging. I have picked a fund that tracks the S&P 500. And you will be hard pressed to find a fund that costs as low as 0.04% per year.
Remember what I said above, you should spend time understanding where your money is going and how it’s growing. It’s up to you because no one cares as much about your money as you do. Use the advice and opinions of other people, but blindly trust no one. And remember, at the end of the day, saving money is pointless if we aren’t doing something with that money.