Rule #6: Use index funds when possible | Investing for beginners
Вставка
- Опубліковано 9 вер 2024
- These are the ten rules of common sense investing for beginners. Learn how to tell a good mutual fund from a bad one. What is an index fund? And why do they outperform in the long run?
Free must-read guide: Smart Investing For Beginners financinglife....
Free must-read guide: Build an All-Weather Portfolio financinglife....
Free course: Common Sense Investing academy.financ...
Free course: Where Should I Put Money academy.financ...
Free course: 9-Steps To Financial Independence financinglife....
Free resources: Learn How To Invest financinglife....
Recommendations: Best Books On Investing financinglife....
Learn more from books I recommend at my Amazon Influencer page:
amazon.com/sho...
▼The Ten Rules of Common Sense Investing is a series to teach investing for beginners:
✅ Rule #1: Develop a workable plan • Rule#1: Goal-based inv...
✅ Rule #2: Start saving money early • Rule#2: Start saving e...
✅ Rule #3: Control stock market risk exposure • Rule#3: Control stock ...
✅ Rule #4: Diversify stocks • Rule #4: Diversify sto...
✅ Rule #5: Never try to time the market • Rule #5: Never try to ...
✅ Rule #6: Use index funds when possible • Rule #6: Use index fun...
✅ Rule #7: Keep costs low • Rule #7: Keep costs lo...
✅ Rule #8: Minimize taxes • Rule #8: Minimize taxe...
✅ Rule #9: Keep it simple • Investing Rule #9: Kee...
✅ Rule #10: Stay the course • Investing Rule #10: St...
These are also endearingly called the Boglehead Investment Philosophy. I call them the Ten Rules of Common Sense Investing as a nod to my favorite book by John C. Bogle.
▼Other helpful playlists:
✅ Bond Basics • Bond Basics 1: What is...
✅ Why Bother With Bonds • Bond Basics 6: Asset a...
▼Articles and Courses:
* Smart Investing for Beginners - complete guide at financinglife....
* Rule#6: Use index funds and passive investing - transcript at financinglife....
* Both free and small-fee courses at academy.financ...
These guiding principles of investing for beginners are also called the Boglehead Investment Philosophy, named endearingly after John C. Bogle the champion of common sense investing.
thank you for all the work you do putting up these videos for free, they are so useful and clear
So kind of you to say that. I'm on a mission.... helping people learn what everyone should be taught in school, college, or around kitchen tables, but aren't.
Absolutely! First, dollar cost averaging means investing regularly--like $100 from every paycheck--and this is the most important habit. Second, it removes the emotional component. The $100 buys more stock when the market is up, and less stock when the market is down. Congratulations to you for starting at age 25. You'll be happy you did.
Yes, the bar chart is the probability of an active fund beating the market (or, index funds).
You also asked whether 2% higher cost was still a fair assumption. I pointed to a recent compelling study where the difference in expense ratios of only 1.06% has a staggering cumulative impact.
If you wish to substantially beat the market, please search my site for the video “Warren Buffett on Index Funds” where he tells you how to do this, and why the 99% rest of us should use low-cost index funds.
Making same point in a 2013 article “The Arithmetic of Investment Expenses”, Nobel Laureate William Sharpe compares two similar funds with a difference in expense ratio of 1.06%. The cumulative impact over 20 to 30 years is staggering. In the author’s words, “Under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.” Thanks.Rick
Hi Branden,
Yes I do. I post my transcript with footnotes on my website FinancingLife (dot) org, but the source you are requesting is this book: All About Index Funds, by Richard A Ferri, 2nd Edition, McGraw-Hill, 2007, p.25.
I'll also note that if you follow the discussion forum at Bogleheads (dot) org, you will see that this gets validated annually.
Thank you for your comment, I suspect many others wondered the same.
Best of luck to you and your investing,
Rick
All your videos are excellent. Thank you.
Thanks for watching. I'm currently putting together a course of investing essentials that everyone should know, but they don't teach anywhere. Watch my website later in the summer for an announcement. Perhaps you would like to participate in the Beta version when it is ready?
Yes, I would be interested. Just send me a message and I'll participate. I have good experience in the design and presentation of information, as well as mass communication, and would be happy to help.
thank you so much for these wonderful videos!
Well Done!!
Thanks for your comments Branden. The videos serve as brief introductions to these basic principles. Everyone would be well served to pursue the topics further with good books, and articles. Numerous outstanding references can be found on sites such as
Bogleheads (dot) org (slash) wiki
It’s challenging to squeeze these videos down to a few minutes each.
I’m glad you are on board with indexing, and thanks for watching.
Rick
When watching this video, it appears that the graphic is depicting the historical percentage of funds that have beaten the market.
I took a look at the reference described above, which said:
"In certain cases I will make assumptions about the future return of index funds relative to active returns without the benefit of historic numbers (Figure 2-2)"
I'm saving $40 off every check for my first index fund investment. half way there. i'm just wondering if i should use my bank. or Investment banker?
@conillusionist Thanks for watching! You can help spread the word. Too few people are ever taught this stuff. Tell your friends what you learned and point them to the book or videos. All the best to you! -Rick
didn'i get the full meaning of index fund vs. active aside from management style. so- is an index fund say the SP 500 ? and what is an active fund, a stock? or can both have the asset as sp 500 with only diff being management style? ty 4 vid
Good question. An index fund is passively managed. There are no management decisions so it can be the lowest cost. It is a specified collection, like the biggest 500 companies or all the publicly traded stocks. An actively managed fund tries to beat the market by hiring expensive experts. The idea is that their expertise should enable them to identify winners and losers in advance. The reality is very few can do better than a coin flip BEFORE subtracting their expenses (called ER). And AFTER subtracting their expenses this becomes a losing strategy. It's because they are more expensive. In the long run, very few actively managed funds can beat the market -- and you can't know which funds those will be in advance.
@@FinancingLife Thanks friend. I understand. Helpful point. I'd just as soon trade/buy myself using a candlestick chart and tech analysis e.g. S&P 500 on a dip/correction and hold it. Thx again and hope all's well there
Whoops, I got that backwards didn't I. More stock when the market is down...
Do you have a source for the 50 years 1% figure?
But what about my post above?
Is starting at 27 starting late? I'm considering starting index funds with $5500 each year in TFSA.
Something I was told years ago when deciding to make a career change and I worried about giving up a good career to go back to school to get my degree. My concern was my age when finishing school. He said "You can 40 years old with a degree or without a degree, but when you are 40, you are 40 no matter what. Might as well be 40 with a degree." In other words, you can start at 27, which is better than starting at 28, etc. So no, it's never too late to start.
Nicholas, congratulations for getting started! I think you are referring
to a tax free savings account in Canada which might be like a Roth IRA
here in USA. Sadly, some people don't start until they are age 50 -- and
it is still not too late. Starting early lets you harness the miracle
of compound interest. Whenever you start, the amount you accumulate
enables the lifestyle you will enjoy once you are no longer working.
What kind of returns can i expect how risky is it ? I have about 3,000 dollars i want to purchase a index fund from vanguard either the S&P 500 ETF or total stock market ETF which account would be better?
NOT EFT, if you plan on adding more money to it. They charge transaction costs, so each time you add money, they charge you.
If you have a no commision ETF its not a big deal but I like mutual funds because you can easily buy fractional shares and do automatic investments. I like the total stock market personally.
1:00 WHAT??
no... that is not true, the company could have made a profit.... Thus both could be the a "winner" while the customer on the backend is the one who lost money....
Thanks for your question Christopher. Remember, "the Market" is the collection of all stocks and all investors. So for every active manager who beats the average market return, another loses by the same amount. This is true because it is the entire collection that establishes the Market return. It would be arithmetically impossible for everyone to "beat the Market". I think it will make sense to you when you think about the Market in aggregate, and it reveals these truths that John Bogle has spoken so eloquently about for decades.
+FinancingLife101 What if everyone buys, holds and gets paid their dividends? Not a single invester would lose....
From there they all make a profit, and then sell to new people who will do the same?
The money keeps flowing in, and thus in theory, nobody would lose money but the end consumer.
Edit:
But yes, i do 100% agree, index funds are the best thing to buy :D
I'm on board with indexing. I just think some of the information in this video is misleading/unsubstantiated.
lesson from bogle