First things first: Optimized budget? Out of debt? Substantial emergency fund established? Great! Why those three things first? The stock market is volatile meaning that you don’t want money in the stock market that you need to use tomorrow, next month, or even next year. Preferably, you won’t need that money for at least 3-5 years. Money invested in the stock market can lose 10-30% (or more) of its value, sometimes very unexpectedly. You want the cash for your emergency fund in hand so that you don’t have to sell your shares in the market when a crash happens (and it WILL happen.) Ideally, you want to be able to buy when everyone else is selling.
Because you have those three boxes checked, you are now ready to start investing in the stock market. But where do you start? You might think, “Now, I have to get a financial advisor.” I did that path. Three years later I’ve paid significant recurring (and often hidden) fees for very poor results. I’m talking in terms of 40% worse returns than the S&P 500 index over the same time period. (The S&P 500 is essentially just a benchmark in which you can compare your performance. It comprises 500 large companies and reflects all their stock prices combined.) Not sure what 40% worse returns looks like over three years Here it is:
- Let’s say I invested $1,000 in 2017. It would be worth $785 today
- If I had invested $1,000 over the same time frame in the S&P 500, it would be worth $1,177 today
- That’s a difference of $392. Seems small, but add a couple zeros and it gets much more alarming.
There is another investment path and it doesn’t have to be complicated at all. Let me simplify it into basic steps to get you started investing with index funds. Index funds are funds that follow a predetermined “basket” of investments. Some common indexes, not to be confused with index funds, are the S&P 500, Nasdaq, and Dow Jones. You can’t invest in the actual index because it is only a benchmark, but there are index funds that are designed specifically to track certain indexes. (More on this later.)
Also, now’s a good time to remind you that I’m not a professional. Don’t confuse this as specific financial advice (see disclaimer.) It is simply a model to demonstrate the ease in which one can get started investing in index funds.
The Simple Path to Investing in Index Funds in 15-Minutes or Less
- Open an account through a brokerage company. I suggest Fidelity or Charles Schwab because they allow you to buy fractional shares of exchange-traded funds (ETFs)/stocks.
- Choose the type of account. You do not need an employer-sponsored 401(k) to save for retirement. If you make less than a certain amount of money, you can open a Roth IRA. Otherwise, most people can open a traditional IRA. Roth IRAs allow you to put in taxed income and if you pull it out after age 59 ½, you won’t get taxed on any gains (this is incredibly nice of the government.) A simple brokerage account can also work if you want access to the funds before turning 59 ½. Please note: Any gains would be subject to taxes when you sell.
- Once your account is set up, determine how much money you want to contribute to your account (Note: IRAs have yearly contribution limits. Taxable brokerage accounts do not.) Just remember, you don’t want to have to touch this money for a very long-time even if you plan to take it out before 59 ½.
- Determine which index funds to invest in. ETFs are a great option. ETFs are funds that are traded just like a stock. Their price changes throughout the day as they are traded throughout a day. Mutual funds only trade once per day at market close.
Let’s talk about tickers for a second. Every stock, ETF, or mutual fund has one. It is simply code letters to denote specific stocks or funds, similar to letters denoting different airports.
- Want to match the S&P 500 index? SPY (SPDR S&P 500 ETF Trust) or VOO (Vanguard S&P 500 ETF) could do the trick. I chose VOO because it has slightly lower fees.
- Want to match the Nasdaq index? Ticker QQQ (Invesco QQQ Trust Series 1) will get you the 100 largest non-financial companies listed on the Nasdaq.
- Want exposure to just about all of the US stock market? Ticker VTI (The Vanguard Total Stock Market ETF) will do just that.
- There are countless articles online outlining the different ETFs. There are also many beginner-friendly books that can help you choose.
- Put in a market order (market order simply means you will pay whatever price is currently being offered, long-terms investors don’t really need to worry about initial purchase price) to purchase the # of shares you wish to buy. Then, sit back and relax. Don’t feel the need to sell these shares anytime soon. Ride the waves of the market, over time, the stock market has always gone up. Consider adding to your positions every two weeks as more money comes available. Don’t try to time the market. This is known as dollar-cost averaging.
Is It Really That Simple?
Yes! It can be.
In life, we often try to overcomplicate things and end up getting really overwhelmed. Investing in the stock market is no different. Investing in a SPY or VOO would guarantee that your returns would at the very least match the S&P 500. In the past 100 years, the S&P 500 has averaged 10% annualized returns. Investors can’t complain too much about that and it would be as simple as owning and buying more shares of one S&P 500 ETF and holding them for the long-term.
Admittedly, I expect this might take you more than 15-minutes, but that is beside the point. All I really want you to see is that getting started investing for your future is WAY simpler than you think. You might make mistakes, but I would argue that never getting started is the BIGGEST mistake of all. You can invest wisely and avoid the excessive fees that financial institutions want to push on you. Buying a low-cost index fund may be the best financial decision you ever make. Don’t let fear or lack of complete understanding get in your way of financial independence.
Interested in learning more about index investing? ChooseFI is a great resource.
Disclaimer: Brandon Gierach owns shares of VOO and QQQ. Investing in the stock market is inherently risky. There is always a potential that investing in the stock market could lead to loss of capital. I am not a lawyer or certified financial advisor. This post is only to be meant as a guide, not specific financial advice.