You may have heard of Index funds and how useful they are for building wealth. Here is a short beginner level explanation of them.
Index funds are a giant mix of stocks from multiple companies provided by a brokerage based on a measured stock index or a theme (i.e. tech, bio, medical etc.). To make it simple, if you buy $1 of a tech index that has only Apple stock and Intel stock, then index has a buying 50/50 ratio. You’d be buying 50 cents of each stock. It’s much easier to stash away more affordable amounts with this style rather than traditional stocks. You also get much less impact when a stock or stocks tank. If a few companies tank there are many others in your investment that can make up for the losses.
An example of a highly recommended index is Vanguard’s VFIAX. It follows the S&P 500 and is a low cost fund with exposure to the 500 companies that the S&P track. It might be even easier to understand how this all works with more companies. Let’s say Amazon tanks one day, the blow to your index would be far less damaging than if you had only purchased Amazon stock. Unless you’re already rich and have thousands to spend, then the ways talked about here are probably easier. This however, works in reverse as well; if Amazon does super amazing, you will only raise your fund by a couple percent (or by however many percent the fund you’re in is invested in Amazon relative to other stocks).
The dividends paid out by VFIAX aren’t phenomenal (currently around 1.23%). But we aren’t trying to get rich quick. We want our wealth to increase as the total market grows and strengthens. It’s a slow process, but many folks have created financial independence from this method.
I personally use and recommend using Vanguard as your brokerage and starting with index funds. It can be a bit pricey to start, as the minimum to start with VFIAX is $3,000. The big positive after that though, is your future investments in the fund can be as little as 1 cent after the minimum is paid. That’s what makes it a much more affordable way to invest, rather than stocks. It may take time to save that amount, but it pays off big time in the end.
If you guys are more interested in index funds or building wealth you should check out “The Simple Path to Wealth” By J.L. Collins. It’s a great read with tons of information, containing plenty of anecdotes and stories to help digest the amount of knowledge presented. Mr. Collins also has a blog that you can check out if shorter reading is better for you.
Thanks for reading, if you have any questions or input don’t hesitate to contact me! – JC