The Personal Finance Podcast - Why Index Funds Are King (Plus My Favorite Index Funds!)

Episode Date: March 31, 2021

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On this episode of the personal finance podcast, we're going to talk about why index funds are king. What's up everybody and welcome to the personal finance podcast. I'm your host and founder of dollar after dollar.com. And today on the personal finance podcast, we have a topic that has been a long time coming. And we're going to finally talk about index funds. And why your boy loves index funds. so much. If you have any questions at all about this episode or any questions in general, follow me on Instagram at Dollar A-F-T-R-Dolar. Like I said in the past couple of episodes,

we just started that Instagram, and if you have questions, it's the fastest way to ask me questions. And a lot of, a ton of people have been asking me questions in the DMs, and we get back to you in a couple of days. So it's the best way to get a hold of me, and I'll answer any questions you have about this episode or anything else with your personal finances. And I don't say this enough, but if you want to help the show out, leave me a review on Apple Podcasts. Leave me a five-star review on Apple Podcasts. If you don't like the show and you want to leave me a one-star review, don't leave a review. But if you can leave me a five-star review on Apple podcast, it is the best way to help support the show. Now, if you've listened to the personal

finance podcast for any amount of time, you know that my favorite way to invest is to invest in index funds. And there's a huge reason why I do that. But one of the biggest reasons is that most people can invest in index funds and it's an extremely passive investment where you don't have to think about your investments at all. So if you want to invest your money and never have to think about them again, but you want to make a nice rate of return and beat most people who are investing in the market, then an index fund is for you. And there's a number of scenarios that I always give. Hey, what if you invest X amount every single week? And we do this on the Instagram as well. I've had two posts this week talking about what happens if you invest $20 a week into an index fund? What would happen there?

Newsflash, if you invest $20 a week into an index fund, you're going to have well over $200,000 within the next 35 years. The same thing, if you invest $100 a week, you're going to be a millionaire over the course of 30 to 40 years. And that's the power of index funds. It's consistency, and it's allowing yourself to build wealth without having to think about it. Now, what the heck are index funds? That's one of the biggest questions that people have. and let me explain it to you in simple terms. Because an index fund technically is actually an index mutual fund. Well, what's a mutual fund?

A mutual fund is a basket of stocks. So you can think about a basket of stocks. So a traditional mutual fund fund usually has a bunch of stocks that a fund manager actually picked. So you can think of the big guys on Wall Street, those are actually fund managers and they select specific stocks to go inside of a mutual fund. Now here's the problem with having a mutual fund that's not an index fund. because mutual funds have fund managers. Those managers also have people in place

who have to try to select stocks and figure out what the best stocks are. So they have high expense ratios or high fees. But an index fund is different because all an index fund does is it's just like a mutual fund, it's a big basket of stocks. And you could think of companies

like Johnson & Johnson, Procter & Gamble, Amazon, Tesla, Netflix, Apple, Microsoft, all of these companies into one big basket. The index funds that I invest in, these are some of the highest weighted companies within those index funds. And all an index fund is, is a basket of stocks that mirrors an index. Well, what the heck is an index? You've heard me talk about things like the S&P 500. That's an index.

That's the 500 best companies in the United States of America. The S&P 500 is the 500 best companies. You can invest in the 500 best companies by just clicking one button. And that's why it's so powerful. But guess why the expense ratios are so low on index funds? why the fees are so low? Because all they do is mirror the index. So all they do is mirror exactly what the S&P 500 is doing.

They're not trying to select the best stocks from all over the place and having this giant team and this high paid fund manager trying to select the stocks for you. No, it's just mirroring the index. And historically, index funds have outperformed mutual funds. And they've outperformed mutual fund managers, especially when you take into consideration the fees. And that's the beautiful thing about index funds because their fees are extremely low.

And we're going to deep dive into the fees shortly because fees will absolutely kill you. They can amount to well above six figures. History has shown that it's extremely difficult to beat the passive investment market returns year in and year out. And that is why index funds are amazing because they're just mirroring the index. They're taking the emotion out of it. And who's to say that your mutual fund manager is not investing with emotional ties involved. Sometimes mutual fund managers get into competition and they start investing and taking risky investments because of that. But index funds don't do those things. Index funds just mirror

the index. They have low costs and they're amazing, amazing investments for most people, especially if you want to invest passively. Even the greatest investor of all time Warren Buffett recommends that pretty much everyone should be investing in index funds. In fact, Warren Buffett even made a million dollar bet with a hedge fund manager. This was about 10 years ago. That's a that in 10 years, an index fund would outperform the hedge fund manager. And the reason why Warren Buffett made this bet is his contention was that if you add in fees and expenses, the S&P 500 index fund would outperform any handpicked portfolio by a hedge fund over the course of 10 years.

Because what this bet did was it put a competition up between passive investing, where you don't have to think about it, you just invest in an index fund and move on with your day, and active investing, where you have to put a bunch of time in, look at P&Ls, look at all these different ratios to be able to invest in the right companies. Let me just break the punchline for you. Warren Buffett won big time. His pick, the S&P 500 index fund, gained 125.8% over the course of 10 years. And the five hedge funds gained about 36% over that same time frame.

I don't know about you, but getting the highest returns with the least amount of effort is my biggest priority. And that's what index funds do. because now you can focus your time and energy on other things that matter to you. Whether it's your family, whether it's increasing your income, which is the biggest propeller with building wealth. Whether it's spending more leisure time or traveling the world, you don't have to think about your investments when you invest in index funds.

And that's the amazing part about it. Warren Buffett also instructs his children's funds be in index funds. So when he dies, he put his wife's money in index funds, he put his kids money in index funds, and I'll show you the exact portfolio he uses. later on in this episode, but every single person in his life, all of his loved ones, are all going to be invested in index funds when he dies. The greatest investor of all time is telling you to invest in index funds. And here's a quote that he said, a low-cost index fund is the most sensible equity investment

for the great majority of investors. By periodically investing in index funds, the no-nothing investor could actually outperform most investment professionals. So what he's saying here is you can outperform people who do this for a living by just investing in index funds because it takes the emotion out, it takes the fees out, everything is gone and all you have to do is just plug and play. What if I told you that you could click one button? This sounds like clickbait. What if I told you you could click one button and become a millionaire? Well, you absolutely can do that. All you have to do is invest X amount of dollars,

let's say 500 bucks a month, which is this is an actual number that you can utilize and become a millionaire, and invest it for 35 years. All you do is click one button, have it automatically transferred in your brokerage account every single month, and WAMO, wait 35 years. That's how this works. That's the power of index funds. It's a set it and forget it system. I don't know about you, but a set it and forget it system, especially when it comes to my money, is the best thing for me.

Now, if you want to play with other investments, that's great. And we're going to have an episode coming up on how you can do that. I follow what's called the 90-10 rule. 90% of my money goes into index funds and 10% goes into whatever else I want. You want to buy Bitcoin, ball out. You want to buy extra Tesla, ball out. But Tesla's actually a major stock within an index fund. You want to buy gold, you want to buy silver, you want to buy NBA top shots.

It doesn't matter what you want to do. You can do that. And we'll have the episode coming up, but the 90-10 rule, think through that if you want to buy other things. And one of the biggest things to talk about, and we'll get into it right now, is the fees. So let's get into why the fees are so important when it comes to investing in index funds. So lately, I've been noticing how fast. things are changing at home. The kids are growing like crazy. Clothes don't fit anymore and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility

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I want to help my kids, and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. An IG private wealth advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you. you at the center. Find your advisor at IG Private Wealth.com. So one of the biggest things you want to do when you are investing is you want to avoid fees. This is why a lot of people won't benefit from a

financial advisor because a 1% fee, which doesn't sound like a lot, can cost you six figures over the lifetime of your investing career. So a lot of people walk in with people who recommend a financial advisor to them and they have no idea what they're getting into because the financial advisor will charge them one to two percent and they don't realize that's one to two percent compounding against them over time. And we're going to have a whole episode on the impact. Should you get a financial advisor or not? And in some situations, maybe you should. But index funds provide you the investing power to be extremely well diversified and still get in the game and have great returns. Because historically, index funds have returned seven to nine

percent, depending on what index fund you actually invest in. Seven to nine percent compounded over time will net small amounts of money to large amounts of money and that's what the goal is with investing. So when you want to find fees, if you're looking at a mutual fund or if you're looking at an index fund or whatever else you're looking at, the fees are found in what is called the expense ratio. Now, anything above 1% is way too higher, what they say 100 basis points. Now half of that, which is a half a percent is 50 basis points. And half of a percent is still pretty high. The index funds that I invest in have either a 0% expense ratio or a 0.05% expense ratio. So what that means is you're paying extremely low fees because index funds don't cost as much as

mutual funds to maintain. So how much is too much? I think anything above half a percent is too much. And once you're getting above that half a percent, you're just really encroaching on something that you don't need to do because there's so many great index funds out there that are 0.05 percent or 0.15%. And there's a lot of index funds now, like Fidelity came out with a bunch about a year or two ago, that have zero fees at all.

And that's the amazing power of index funds. They don't have fees. And these fees will save you six figures over the course of your investing career. I cannot stress enough how important it is for you guys to understand the power of fees. So here are a few other pros of index funds, is they don't require you to be an expert.

So you don't have to be an expert in trading stocks or equities or any type of investment bonds, it doesn't matter what it is, to invest in an index fund. Because all it is is you're mirroring the index. And so you don't have to worry about looking at different ratios and looking at financial reports, which is what you have to do if you're going to invest in individual stocks. Because if you're buying stocks without actually doing the analysis,

you're just gambling. That's why you buy a well-diversified basket of stocks that will allow you consistency over time. And historically, index funds have proven that. You can skip the corporate financial analysis. There is nothing more boring to 99.9% of people in this world than having to read a 10K. If you don't know what a 10K is, it's a financial document that comes out. And you have to be reading these if you're investing in individual stocks if you want to do it the right way.

But if you love accounting, maybe you'll love a 10K. But if you don't love accounting, which most people don't, or you don't understand accounting, which most people don't, then there's no reason for you to be investing in some of these companies. Index funds are the ultimate diversification. They're the ultimate diversification. Why? You can buy an index fund like the S&P 500 index fund that we just talked about, which is 500 companies that you're buying with one click of a button.

Or another one that I love is the total stock market index fund, which you're buying pretty much all the stocks in the stock market in one basket of a fund. How much more diversified do you want to get? It's the ultimate form of diversification. One thing about diversification to note is when people talk about true diversification, they're talking about two investments that won't go in the same direction if something goes wrong. Now, an index fund is a basket of companies that obviously if the market goes down, your one investment will go down.

So what people will hedge against is maybe buying a bond index fund. Usually stocks and bonds will go in different directions. Another pro of index funds, the low expense ratio that we just talked about. We went in great detail about the low expense ratio and how powerful that is because it's going to save you six figures over your lifetime. and then a stronger long-term return. There's been study after study after study done that index funds beat the majority of mutual fund investors.

What else do you need? You get a higher return. You don't have to think about your investment. You get lower expense ratio and it's ideal for buy and hold passive investors. This is why you look at every person who's been investing for a long time and they talk about index fund and they say,

yeah, they're a great investment for most people. Every single person out there. Now, there is one alternative that you can consider to index funds, and they're called ETFs or exchange traded funds. And what ETFs are is they're just like an index fund. It's buying a basket of stocks, but they trade like a stock. So an index fund actually trades once each day. But ETFs, you can trade at any time that you want.

And ETFs don't have any minimums. Some index funds out there, like if you look at the Vanguard funds, they'll have minimum balances that you have to acquire. Now, the Fidelity ones, I don't think they do anymore. But ETFs, you can get in like you would have stock. so all you have to do is have enough if you're just getting started out to buy the share. And with all these companies with fractional shares, now you can actually buy fractional shares of ETFs. So the cool thing about this is, ETFs are a great way to get started if you want more

liquidity within your portfolio. And an ETF and an index fund literally are the exact same thing. They just trade a little bit differently in terms of one trades like a stock and one trades like a mutual fund. That's the only difference between the two. So if you're looking for an alternative option with that maybe is a little more liquid, then an ETF might be a great option for you as well. Now, how do you invest in an index fund? How do you go about doing this? Well, there's a number of ways. One is you can open a brokerage account, a traditional brokerage account,

or you can invest in an index fund inside your retirement accounts. So what do I mean by that? Well, what you do is you open up your brokerage account or your retirement account, you put money in there inside of your brokerage account, and then you buy an index fund that way. So what I'm going to talk about here shortly is some index funds that you can buy. But one of my favorites is called VTSAX. So it's the Vanguard Total Stock Market.

index fund. And BTSAX is where you're buying the entire stock market in one basket. Well, what you're going to do is you're going to put cash into your Vanguard account and you're going to go ahead and buy an index fund that way. Because when you put cash in, then you just type in BTSAX, Vanguard index fund comes up for the total stock market index fund and you just push by. That's exactly how you do it. But you can do this in Fidelity, you can do it in Schwab. It doesn't matter what brokerage you use. You can do it with your 401K, your employee sponsored plan, if they offer. index funds. And if they don't talk to your HR department, see if they can offer index funds. A lot of companies offer them now because they understand the power of them. But if yours

doesn't, talk to your HR department, see if they can offer index funds within your 401k offerings. Now, let's get into my favorite index funds. So before we wrap this bad boy up, I wanted to give you some of my favorite index funds because you can put together a fantastic portfolio with just index funds. And the first one I want to talk about is the one that Warren Buffett recommend. the exact index funds that he buys for his family. And so Warren Buffett's a Vanguard guy, him and Jack Bogle, the founder of Vanguard are good friends. And Vanguard was the originator or the first company that really started pushing index funds. What he buys for his family is the Vanguard S&P 500 index funds, which is VFIAX, which is a very low expense ratio.

And then the Vanguard short-term Treasury Index Fund, which is VSBSX. Now, when you hear me saying these letters, what that means is that's called a ticker symbol. And what you do is when you're buying an index fund, you put those letters in, or you can just search for a Vanguard, S&P 500 index fund, and it'll come up. And what you want to do is when you're trying to invest in an index fund, you just put that ticker symbol in or you just search for it and you buy it that way. So what Warren Buffett does is he puts 90% of his money into the S&P 500 index fund, and he puts 10% of his money. into the bond index fund. And that's a great, fantastic index fund portfolio because the bonds will hedge against risk and the S&P 500 index fund will grow over time. And then another very popular set of index funds is the three fund portfolio. So you can think of buying a total stock market

index fund. So my favorite is VTSAX or there's also VTSMX, which is both Vanguard's fund. So I invest personally in VTSAX. My Roth IRA is in VTSAX. My 401k is in VTSAX. That's the total stock market index fund. My wife's is in the S&P 500 index fund. Both are fantastic. They're pretty close to the same returns. They both have pretty close to the same weight, but I just like to have a piece of both. But within a three fund portfolio, you can buy the total stock market index fund, a total international stock market index fund, and then a total bond market fund. And that three fund portfolio is fantastic for most people. Fidelity makes them with zero fee. So I'm just going to throw these out there so you guys can see them. There's a zero total stock market index fund. It's called

F-Z-R-O-X. And there's a zero total international index fund, which is F-Z-I-L-X. Both of those index funds have zero minimums and zero fees. So if you're a beginner, those are fantastic as well. And it doesn't really matter what company you go with with your index fund. As long as the fees are low to zero, and as long as they are mirroring the index, then you're going to get the same returns. Honestly, figuring out which one has the lowest fees to zero fees. Now, one last thing I want to get into, before we wrap this episode up,

is I just want to show you the highest weighted companies within the S&P 500 index fund. Just so you get an idea of what you're buying here. So number one is Apple. Fantastic company. These are all fantastic companies, as you'll see. So you'll see you're buying a great basket of stocks. Number two is Microsoft.

Number three is Amazon. Four is Facebook. Five and six are Google. Seven is Tesla. Eight is Berkshire Hathaway, which is owned by our good friend, Warren Buffett. Nine is Chase, J.P. Morgan Chase.

Ten is Johnson and Johnson. 11 is Visa. 12 is United Healthcare. 13 is Disney. 14 is Procter & Gamble. 15 is Home Depot. 16 is MasterCard. 17 is Invita.

18 is Bank of America. 19 is PayPal. 20 is Comcast. 21 is Intel, 22 is Exxon, 23 is Verizon, 24 is Netflix, 25 is Adobe. These are all massive companies that you know. And so you're buying a great fantastic basket of stocks, a fantastic companies, all in one click. If you want to see a visual representation of some of these top companies, check out on Instagram. Dollar A-F-T-R dollar.

I did a chart that shows some of the top companies in the S&P 500. And it'll give you a great visual representation of what that looks like. I'll leave a link in the show notes to some of the articles that we've written on Index Fund. So if you want it some further reading, check that out as well. And don't forget to leave a rating and review, a five-star rating and review on Apple Podcasts. And we'll see you on the next episode. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode.

And share this episode with a friend. And don't forget to leave a rating and review on iTunes as well. because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do is to buy more freedom. So thank you again so much for listening, and I hope you have a great day. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time.

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