Why Index Funds Are King (Plus My Favorite Index Funds!)

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 is been a long time coming and we're gonna 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 our dollar 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 ahold 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 an 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 in an index fund you're gonna 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 usually has a bunch of stocks that our bond 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 and johnson procter and 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 indexes and all an index fund is is a basket of stocks that mirrors an index 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 united states of america the s&p 500 is the 500 best companies you can invest in the 500 best companies with 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 know 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 then 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 the 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 the hedge fund manager. This was about 10 years ago, that in 10 years, an index fund would outperform the hedge fund manager. And the reason why board Warren Buffett made this bet is his contention was that if you added in fees and expenses, the s&p 500 index fund would outperform any handpick portfolio by a hedge fund over the course of 10 years. Because what this bet did was it put a competition 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, we get to put a bunch of time and look at p&l. Look at all these different ratios to be able to invest in the right companies. Let me just break the punch line for you. Warren Buffett one 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 timeframe. 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 to 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 spinning more leisure time or traveling the world 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 that he 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 buy periodically investing in index funds, the know nothing investor can 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 can 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 maybe become a millionaire investor for 35 years, all you do is click one button, have it automatically transferred in your brokerage account every single month, and whammo wait 35 years. That's how this works. That's the power of index funds. It's a set and forget 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 you want to play with other investments. That's great. And we're gonna have an episode coming up on how you can do that I follow what's called the 9010 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 9010 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 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 2%. And they don't realize that's one to 2% compounding against them over time. And we're gonna have a whole episode on the impact should you get a financial advisor or not, 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 9% depending on what index fund you actually invest in. Seven to 9% compounded over time will net small amounts of money to large amounts of money and that's what the goal is with investing. So what you want to find fees if you're looking at a mutual fund or if you're looking at an index under whatever else you're looking at the fees are found in what is called the expense ratio now anything above 1% is way too high or what they say 100 basis points now half of that which is a half a percent is 50 basis points and half 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% 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 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 then 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 company index funds are the ultimate diversification 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 and 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 bought 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 gonna 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 funds i 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 an etf 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 in 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 than 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 some index funds that you can buy but one of my favorites is called vts a x so it's the vanguard total stock market index fund and btsa x 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 funds that way because when you put cash in then you just type in vts a x vanguard index fund comes up for the total stock market index fund and you just push buy 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 employer 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 hr 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 recommends 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 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 v FIAX which has a very low expense ratio and then the vanguard short term treasury index fund which is v s BSX now when you 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 and or you just search for it and you buy it that way so what warren buffett does is he put 90% of his 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 vt sa x or there's also a vts mx which is both vanguards fund so i invest personally in btsa x my roth ira is in btsa x my 401 ks and btsa x 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 the pretty close 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 FZRO x and there's a zero total international index fund which is FZIL x both of those index funds have zero minimums and zero fees so if you're 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 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 jpmorgan chase 10 is johnson and johnson 11 is vsa 12 is unitedhealthcare 13 is disney 14 is procter and gamble 15 is home depot 16 is mastercard 17 is in visa 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 us out on instagram dollar aftr 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 article calls that we've written on index funds. So if you want 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 it's 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.