- March 12, 2018
- Posted by: fortunatetrader
- Category: Market
How to increase my rate of return using index funds.
Welcome to the second article of the series: “How to increase my rate of return”.
In this one I want to show you how it’s possible to manage your money diversifying your portfolio like a fund manager.
Human beings are great.
Human beings are smart.
People can now travel and book a flight to Tokyo for less than $1 500.
People are writing blogs and connecting with the world.
According to Gallup’s State of the American Workplace report, 43 percent of Americans said they spent at least some time working remotely in 2016. In the same time period, the number of people working remotely four or five days a week rose from 24 percent to 31 percent.
Leaders from the Global Leadership Summit in London in 2014 reported that 34% said more than half their company’s full-time workforce would be working remotely by 2020.
People are building tables using Pinterest and YouTube.
But when we start talking about managing your own money, your family and your friends are like “Ohhhh my god don’t do that. You don’t know how to do it. You may have studied in that field but you haven’t worked in it.” It’s worse again if you haven’t studied numbers and complicated formulas in school.
Let’s give a straight analysis using some life examples.
I’m mowing the grass and yet I haven’t done a master degree in botanical or landscaping.
I’m cooking and I’m just using the books and the blog posts that I found online. I’m not paying a chef to come to my house every day to cook my meal.
I’m probably not the best handyman with a hammer but I can definitely become better at it using the unlimited resources available to me out there in the world wide web. I can start by sawing a block of wood and after that, move on to build a piece of furniture.
So start with that and make your own opinion about if you can become good enough to manage YOUR own money.
Don’t get distracted by others.
You might remember the article about index funds: How to increase my rate of return avoiding outrageous fees.
Index funds are a good start if you want to avoid the irrelevant fees.
Index funds are easy and unexciting. If you want your investments to be a hobby that is appealing, thrilling, captivating, thought-provoking, and self-satisfied, you probably won’t like index funds.
If your primary goal is to reach above-average returns with the less work possible; index funds should be your go-to man.
Index funds automatically make you an above-average investor. The reason is ironic: Index-fund managers don’t try to beat the market. Their job is to be the market, and it’s easy for them to succeed.
You can ask an index fund manager to help you to have access to a portfolio of that type or acquire it yourself through some ETFs. Either way you can now tell all your friends that you have invested in the stock market.
By yourself you took a portion of your money and you have selected the SPY or the Vanguard 500 and you are in the 500 largest companies whose stock is listed for trading on the NYSE or NASDAQ.
Do you have to watch the news every day? Nope.
Do you have to read all the financial magazines concerning the 500 businesses in the index? Nope.
You don’t have to actually do anything about whatever is going on in the markets. The index funds do it automatically.
Investing in a mutual fund vs an index fund
I’m adjusting a simple and fascinating example that I have borrowed from one of Jack C Bogle article: The Arithmetic of “All-In” Investment Expenses.
In his example, Sir Bogle, uses a 30-year-old investor that begins to save for retirement at age 70, a span of 4 decades, by investing in a tax-deferred plan. The new born investor earns $30,000 annually and will grow at a 3% annual rate thereafter. In his table, he presents a comparison of the retirement plan accumulation if the investor were to invest 10% of his compensation each year in either an actively managed large-cap equity fund or the Vanguard Total Stock Market Index Fund. The table summarizes the results over the four decades that follow.
Let me try to help you focus on some of the important numbers here. Assuming a nominal annual return of 7% in each vehicle: Actively managed fund and index fund. The all-in cost of both vehicles are respectively 2.27% for the managed fund and 0.06% for the index fund.
After a period of 40 years the actively managed fund comes to a total of $561 000 vs the index fund with a total of $927 000.
The same amount of money put annually in both vehicles ends up with a difference of $366 000; an enhancement in capital of 65% difference!!!! Are you kidding me?!
“Compared with costly actively managed funds, over time, low-cost index funds create extra wealth of 65% for retirement plan investors.”—Jack C Bogle.
As said previously, investing in an Exchange-Traded fund that shadows a particular index is sleep-easy.
They cost very little to buy and own, they are highly regulated, and they provide the same massive diversification of most of the mutual funds but with easier control. They’re extremely liquid and require little emotional involvement.
Here is a list of ETFs. I personally suggest that you start with the American ETF first.
– Make It Happen –