In several of my other tips, I have used 8% as the rate of return for example calculations. Some folks have responded with comments concerning the viability of that rate of return. Fact is, an 8% return is slightly lower than what the S&P 500 has averaged since 1926 (9% +).
For those of you unfamiliar with what exactly the S&P 500 represents, it is a capitalization weighted index of roughly the 500 largest publicly traded companies in the US.
The problem so many investors face when dealing with investing in the “stock market”, is the vast number of choices. There are around 4,000 companies traded on US markets with over 7,500 mutual funds available. That is a lot of choices.
I will ignore the individual stocks since I believe most of us should not own individual stocks due to risk and diversification concerns. I believe mutual funds and more specifically index funds are the right way to go. They allow for sufficient diversification while minimizing costs, fees and short term risks.
Why index funds? Actively managed mutual funds have costs and fees that take away from their overall returns. These fees come in all shapes and sizes, but all take away from your returns. Index funds have minimal fees or expenses and you retain 99+% of the returns. And.........
The fact is that 80% of the actively managed mutual funds fail to beat the market on a yearly basis. That means only 20% manage to beat the market average returns in a single year. In addition, over a 10 year period, almost none of them are able to beat or match the index funds when you factor in fees and expenses.
So, why search for the needle in the haystack when you can just buy the haystack? That quote comes from Jack Bogle, founder of Vanguard and the first index fund. His book, The Little Book of Common Sense Investing, is great for breaking down the perceived complexities of markets.
I encourage you to consider index funds and think long term when investing in the stock market. It isn’t sexy with big winners and instant wealth, but rather a proven method over 90+ years. Sure there will be ups and downs, but over a sufficiently long investment window (5+ years) the growth of American companies will result in the growth of your investments and your personal wealth.
For those of you unfamiliar with what exactly the S&P 500 represents, it is a capitalization weighted index of roughly the 500 largest publicly traded companies in the US.
The problem so many investors face when dealing with investing in the “stock market”, is the vast number of choices. There are around 4,000 companies traded on US markets with over 7,500 mutual funds available. That is a lot of choices.
I will ignore the individual stocks since I believe most of us should not own individual stocks due to risk and diversification concerns. I believe mutual funds and more specifically index funds are the right way to go. They allow for sufficient diversification while minimizing costs, fees and short term risks.
Why index funds? Actively managed mutual funds have costs and fees that take away from their overall returns. These fees come in all shapes and sizes, but all take away from your returns. Index funds have minimal fees or expenses and you retain 99+% of the returns. And.........
The fact is that 80% of the actively managed mutual funds fail to beat the market on a yearly basis. That means only 20% manage to beat the market average returns in a single year. In addition, over a 10 year period, almost none of them are able to beat or match the index funds when you factor in fees and expenses.
So, why search for the needle in the haystack when you can just buy the haystack? That quote comes from Jack Bogle, founder of Vanguard and the first index fund. His book, The Little Book of Common Sense Investing, is great for breaking down the perceived complexities of markets.
I encourage you to consider index funds and think long term when investing in the stock market. It isn’t sexy with big winners and instant wealth, but rather a proven method over 90+ years. Sure there will be ups and downs, but over a sufficiently long investment window (5+ years) the growth of American companies will result in the growth of your investments and your personal wealth.
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