Investing gurus Warren Buffett, and David Swensen have both been quoted to say, “index funds are the best way for investors to maximize their chances of investment success.” So, what is an index fund? Index funds are very simple. Rather than spending the time researching and comparing individual stocks, index funds work by purchasing and holding all the stocks in a broad market index.
A few examples of index funds include: Dow Jones, Nasdaq, and S&P 500. Index funds are also great because, as quoted by John Bogle, the founder of Vangaurd, “index funds allow you to invest at a minimal cost in a portfolio diversified to the nth degree.” Essentially this is the difference between using investors that can charge upwards of 2% to manage your funds, which compounded over the course of 60 years, this compounded 2% in fees can absorb 70% of your returns!
Indexing is a great option for the American investor so that they are not stuck putting up 100% of the capitol and left with 100% of the risk only to receive a small percentage of the reward. These lower cost index funds are a great opportunity for college investors like myself who have little money to invest, to purchase and hold for the duration of my lifetime to ensure long-term stock market rewards.
All the data provided above was collected from the New York time’s bestseller, Unshakable by Tony Robbins. I read this book because I am the type of person that before I decide to put all my discretionary income into an investment, I want to do the research first. As a first-timer considering investing, companies working with mutual funds and 401K plans initially seemed like the safer bet. Until I read the staggering statistics of just how much money is being taken from my mutual fund investments to cover fees.
For my very first experiment testing out investing, I used an app called Acorns that automated my investments every time I made a purchase. After reading about the high fees I decided to look for myself and I discovered that I was being charged a 2% fee for using their “round-up” program, which although doesn’t sound like much—compounded this is a huge percentage of my investments.
It was at this moment that I really began considering index funds. Typing “indexing” into google search, I came across a video interview by investment expert Warren Buffet and Bill Gates. Buffett’s advice on investing for the general public was to invest in low-cost index funds such as the S&P 500, and when Mr. Buffett speaks investing advice, it is a good idea to listen. One probable reason that Indexing often outperforms hedge funds, is because hedge fund managers try to outperform the market (index funds), and usually mess up.
To emphasize his point, Buffett placed a bet with Protégé Partners’ Ted Seides, that an S&P 500 index fund would outperform a variety of selected hedge funds over the course of 10 years, beginning 2008. As this bet comes to a close, Buffet states that there is absolutely “no doubt” that the index fund will be victorious. These hedge funds returned a 2.2% compound annual return, versus 7.1% for the index. Warren Buffett himself states that he was only able to outperform the market “ten or so times,” so there is slim chance another manager would be able to do so.
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