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Do you know what an index fund is ?

This blog is meant purely for educational discussion of finance. It contains only general information about financial matters. It is not financial advice, should not be treated as such.



I like saving and making money. It is like a hobby. Investing money and planning your financial future is NOT rocket science and should not be complicated. If it is, you are doing something wrong. In the words of Warren Buffett, "Never invest in something you do not understand".


Do you happen to know what will happen to Warren Buffett's fortune when he dies (the most successful investor of our era)? He has talked about it so it's no secret. 90% of his assets will go to a low cost index fund which tracks the S&P 500. That's it? Yes, that's it. If the "Oracle of Omaha" as he is also known, is planning to do this, then what an average financial advisor with fancy words will tell you is to be questioned.


An index fund is where investors pile their money so that the fund manager invest/buys different amounts of stocks/bonds to represent whichever metric they follow. For example;

VFINX is an index fund tracking the S&P 500. They buy stocks of each company in the S&P 500. The bigger companies will have more shares than the smaller companies.

VBMFX is an index mutual fund tracking the total bond market in the US. Therefore, the manager buys different amounts of all the bonds in the US to represent the bond market in the US.


What is the S&P 500 ? It is a stock market index that measures the stock performance of the 500 largest companies listed in the stock exchange. The better they do, the more money you make. Let's study an S&P 500 index fund, for example, Vanguard's VFINX index fund. (Disclaimer: Vanguard does not pay me honoraries to advertise or promote their products. I just studied them and happen to understand/like them.)

VFINX tracks the S&P 500. The way it does this is by investing in every company in the S&P 500 (Apple, Google, Tesla etc).


Why is VFINX attractive?

  • It is cheap. You pay 0.14% of what you make

  • Performs nearly identical to the S&P 500

  • Beats all of the Active Fund Managers, as demonstrated by Buffett when in 2008 he made a bet that over 10 years the S&P 500 will outperform active managed portfolios (mainly due to cost and commissions). It does not matter how smart you are, how many financial reports you read or how much you pay your financial advisor - YOU WILL NEVER BEAT THE MARKET....

  • Devil is in the details, the cost. THE COST is the issue. What will an average Financial advisor charge you? 1% of your gains, seems like a low number? see it for yourself.

  • VFINX - $100,000 @ 0.14% for 10 years = $1400.

  • Financial Advisor - $100,000 @ 1% for 10 years = $10,000.

VFINX has returned in average 10.37% in the last 10 years.

S&P 500 - 10.53% in the last 10 years.


Bottom line, if the world's most successful investor/billionaire is putting the money for his wife in an index fund, why not you?

Explore the investment options in your 401k. Explore and compare the cost between one another.


Till next time.


JL



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