I started this blog in 2010. At that time I was a young punk that thought I could pick out penny stocks and strike it rich in a matter of minutes. Instead of earning wealth, I quickly acquired humility instead… Fast forward 10+ years. With many mistakes behind me, I have discovered the art of simple investing! A true ‘set it and forget it’ model that I personally use and believe that 97% of the population should too. I mean, who wouldn’t want to earn 10% with little-to-no effort?
No, this isn’t a bad sales pitch. I’m not going to ask you to buy my super-crappy book or e-course (for this one-time low price!! Lol. Kidding, kidding!).
Instead, I’m just going to teach you what I wish I would have known back in my early 20’s. Maybe you’re still young and can get an even better start to investing than I did!
First, What Doesn’t Work – Single Stock Investing
I hear it all around the office. I even hear it within my own family! Statements like…
“I own such-and-such stock. Man it is TOTALLY outperforming the market. I’ve earned 39% with that beauty alone!”
People brag about their winning stocks all the time, but oddly enough you never hear about the ones that took a dive — much like the gambler that has dozens of stories of the big win, but we all know that in the end, the house always comes out on top. Not every stock can be going up. It just doesn’t work that way.
Sure enough, ‘The Balance’ article says it all, “Why Average Investors Earn Below Average Market Returns“.
In this short publication, the article states that between 1995 and 2015, the market went up nearly 10% per year (9.85% to be exact). Guess how much the average investor made (you know, the guy that’s spouting his wisdom at your work Christmas party because he owned Telsa stock in its infancy)? The average investor earned not 10%… And not more than 10%. They earned a paltry 5.19%.
The Difference Between 5.19% vs. 9.85%
Sure, the 5.19% looks pretty bad, but I want to prove to you how bad it really is. I want to play this out.
Let’s say you had $100,000 to invest in 1995. You had the choice of investing it into various stocks, or you could set it and forget it by putting the money into an S&P Index fund. You thought you were smarter than the average bear and chose option #1. So, you invested on your own.
By 2015, you earned 5.19% a year and are now the proud owner of $275,000 worth of stock. Not too shabby right?
Well, hold on a minute…
Then you would have of course earned 9.85% each year instead!
So what does that equate to?
By earning 9.85% instead of 5.19%, you’d have $655,000! Nearly $400,000 more than option #1! Whoa!
Simple Investing – The Option That Flat Out Works!
I think it was back in 2012 when I started shifting my mindset from single stocks to simple investing. That’s when a man by the name of Andrew Hallam reached out to me and told me his story.
- He was a teacher
- He earned a mediocre salary
- And…he was a millionaire
Whoa. Wait, what??
How did he do that?
It wasn’t any fancy scheme. It wasn’t a lucky lottery ticket. He simply lived on less than he made and loaded money into Index Funds. That’s it!
Over time, his money grew and compounded with minuscule fees, and then suddenly, he was worth a million bucks! Boom!
How You Can Start Simple Investing
Again, this is no gimmick. I’m selling you nothing. I just want to help by showing you exactly how I invest and how I believe many of you should too!
Open Up a Vanguard Account
First things first…where do you go to start investing? For a long time (like, decades!) Vanguard has been the leader when it comes to cheap, but quality investments. So why not go with the best?
With Vanguard, you can open up pretty any type of investment (see all the options in the image below). Today though, I’ll be showing you how to open up a regular traditional IRA account.
First, head to the Vanguard site at https://investor.vanguard.com. Then, hover over the “investing” drop-down and select “IRA, Roth, & Traditional”.
Then click, “Open your IRA today”.
And, if you don’t currently have a Vanguard account, select “No” for the next page asking if you are registered on vanguard.com. (If you are, you of course would select “Yes” and follow through with the next page of questions/login information.)
From here, they’ll simply need your personal detail (name, address, social security number, etc.) and your banking information so you can load money into your account for your first investment.
Choose a Low-Cost Index Fund
Once you’ve got your account set up and have a few dollars transferred in from your bank, you can officially select your investment and buy your first shares.
If you were buying single stocks on a broker site, it would probably cost you $9 or more for each transaction. In other words, it will cost money when you buy the shares and it will cost you again when you sell. Then, if you have a broker working on your behalf (or, if you’re buying managed mutual funds instead of single stocks), you could be shelling out another 1% of your invested money.
- By purchasing low-cost index funds through Vanguard, the purchase is often free and the sale is free.
- The management fees are extremely low (like, 0.05%)
- There may be a yearly fee, but typically it’s $20 or less
The Benefits of the Index Fund
You may be asking,
“What’s the big benefit of the index fund then? It seems like stocks are cheaper if you buy and hold for the long term.”
You’re absolutely right. BUT, when I buy one share of an S&P 500 index fund, I’m purchasing a small share of 500 companies. When I buy one share of a single stock, I’m purchasing a share of just one company. My risk factor is way bigger with the one-company purchase. In other words, my odds of losing all my money tomorrow are hundreds of times greater than if I were to diversify my investment with an S&P index fund.
Also, when you own a single stock, it’s way easier to be scared in and out of the market. You can visibly see that share price each and every day. If it starts going down, you’ll be tempted to sell. If it’s on the rise, you might buy back in.
All that buying and selling costs money. Also, by hopping in and out of the market, you’re less likely to reap all of the returns.
Investing across the entire market is more relaxing.
You know you’re investing for the long term and that there will be slight ups and downs. By keeping your money in the index funds, you’ll reap the full rewards of your investments.
My Index Fund of Choice
Approximately one year ago, my wife and I decided to start investing for our kids’ upcoming private school expenses. After all, it’s going to cost us over a hundred grand to put each of them through school. Why not invest the money and make saving a little easier? That’s when I started my index fund research.
What Index Fund did I end up choosing?
The Vanguard “500 Index Admiral Shares – VFIAX”.
- These shares are set up to return the earnings of the S&P 500 index
- The management fee is only 0.04%
- And, the yearly cost is just $20.
Over the last 10 years, this fund has averaged a return of 15.13% per year! That works for me!
If you’re interested in the VFIAX fund, here’s how to find it via Vanguard:
First, just hover over “Investing” and select “Vanguard mutual funds”.
Then, scroll down a fair amount to get to the “U.S. stock funds” section. Near the top, you’ll find VFIAX. If this is what you want to choose, select it and begin investing!
Keep Investing Consistently for the Long Term
Want to make the most out of your investments?
You’ve started out great by…
- Choosing Vanguard, and
- Investing in Index Funds
But what else can you do?
It’s simple. Invest small amounts consistently over a long period of time. The technical term for this is dollar cost averaging, and it has become a proven method for winning in the stock market.
So, open an account and set up a consistent draw from your paycheck. You can either do this through your work or through an automated Vanguard withdrawal. Either way, get it started and then don’t stop it until you’re old and decrepit! You won’t regret it.
Will You Start This Simple Investing Method?
I used to be all about investing in single stocks, high-risk investments, and even speculative precious metals. Not anymore. I’ve been burned too many times.
Through trial and error, I’ve learned that the best way of investing is via simple investing – ie. investing in low-cost index funds!
Are you ready to start simple investing? Are you on board with the following?
- Investing with Vanguard,
- Purchasing low-cost index funds, and
- Investing consistently?
Then I’d say you’re about ready to earn some money! (Of course, this isn’t guaranteed, but historically it has been an excellent choice!). So, what do you say? Are you in? If so, head to Vanguard today!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.