GMR 12: Investing - Index Funds and Brokerages Part 1
EPISODE 12
In this episode of Getting Money Right we’re continuing our conversation on investing for retirement. We want to equip you with modern philosophies for investing and show you where to start. This series will give you the confidence to go out and make some retirement investing decisions and teach you what it takes to become a millionaire.
Show Notes:
Foundational Principles
Never invest in something you don’t understand.
Diversify your investments - don’t buy one stock or invest into one specific investment (don't put all your eggs in one basket).
Investing Long Term
Mutual Funds well diversified across a number of stocks is a great place for investing long-term.
““Stock market returned an average of 11.31% from 1928 through 2010”
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“Over the long term, stocks do better than bonds. Since 1926, large stocks have returned an average of 9.8% per year; long-term government bonds have returned between 5% and 6% ”
Although past performance isn’t a guarantee of future performance in stocks or bonds, 100+ years of data should give investors the confidence to invest in the stock market.
If the stock market has averaged 9%-11% then it is possible for the average American to retire with $1,000,000 or more.
Example of Long-Term Investment Potential Gain
Average Median Household Income – 2012 Census Bureau = $51,000
15% of income toward retirement = about $600/month
If invested from age 30-70…
Based on the percentages below you’d have:
8% = $2,109,168.73
9% = $2,830,458.10
10% = $3,826,668.15
How can you accumulate so much, so quickly?
Compound Interest - Interest earning interest
$10,000 investment at 10% interest earns $1,000 in one year.
$11,000 investment at 10% interest earns $1,100 in the second year.
$12,100 investment at 10% interest earns $1,210 in the third year.
Each year your investment compounds (grows) and grows exponentially.
In 40 years $10,000 investment grows to $452,592.56.
Rule of 72
Rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return.
Anyone can do 72 ÷ 8 (interest rate) = 9 (years)
If it takes 9 years to double a $1,000 investment, then the investment will grow to $2,000 in Year 9
$4,000 in Year 18
$8,000 in Year 27, and so on.
Example: 72/10% = 7 years
$100,000 invested at 10% for 30 years (35-65 years) is:
$100,000 - at start.
$200,000 - at 7 years.
$400,000 - at 14 years.
$800,000 - at 21 years.
$1,600,000 - at 28 years.
This is without any additional investment added outside of interest growth.
Index Funds
Index Funds are Mutual Funds
They attempt to match a “market index”
Index basically means list…. So there are a list of stocks and the index fund uses a computer to buy that list of stocks and only buys or sells when the list changes.
S&P 500 is an index of 500 of the largest companies in the United States/
These are companies you’ve heard of, here are the top 5 currently:
Apple
Microsoft
Exxon
Johnson & Johnson
GE
Buying an S&P 500 index fund, you’re invested in 500 of the top companies in the U.S.
Dow Jones Industrial Average (“The Dow”) is an index of the top 30 companies in the U.S. and it’s been around since 1896.
Index funds are managed by computers mostly so the expenses are very low compared to other mutual funds.
Investing in an index fund is a form of passive investing. Because a person isn’t actively managing and trying to find the best stocks, it’s just a computer picking off of the list.
A majority of actively managed mutual funds fail to beat broad indexes, like the S&P 500. We know that some hedge fund and mutual managers will beat the overall market, we just don’t know which ones it will be. We don’t know who the next Warren Buffet or Philip Fischer will be.
Investment advice from Warren Buffett
““My advice to my trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.””