Peruse almost any public forum that discusses the stock trade, and you will see an interesting trend. The more accessible the forum is, the more cynical its user base will be about one’s ability to make money.
Where does this tendency towards pessimism come from? Why does it pervade popular discussion hubs such as Twitter, Reddit, and Facebook? The answer is somewhat simple: Trading stocks and making money off of them is hard. It takes a lot of analysis and a little patience to make it work consistently.
The public perception of stock trading is quite different though. Most people believe, quite understandably, that there are two factors that matter above all others: Money and luck. If you have more money, it is easier to make a stable living off of stocks. And if you get lucky, you don’t need anything else. But while those are technically true, they are hardly the whole picture.
One of the best things you can do for your own personal development as an investor is to assume that you have little money and no luck. Maybe this is true. Maybe it is not. But thinking of your situation like that will make you ask the essential question of investment: How does one make small numbers big?
Perhaps the best tool ordinary people (that is, people with less than $100,000 to trade with) have is index funds. But what are index funds? How much money do you need to invest in them? And which are the best to invest in? We are going to cover all of these questions, one by one.
In order to understand what an index fund is, you must understand its components. That starts by breaking index funds down into the meaning of the “index” and the meaning of the “fund”, as both of these words have a meaning in this context that is highly specific to the world of investments.
There is a good chance that you might have seen indexes referenced in the marketing of some trading platforms. It is usually listed alongside stocks and options, indicating to many that it is a security like them. That is not exactly the case; while you can trade indexes like securities, they have other uses.
You can think of indexes as databases of stocks. An index will contain a set of stocks in certain amounts. The set of stocks it contains will be determined by factors outlined in a description of the index. For instance, the S&P 500 is an index of the 500 companies in the United States with the highest market cap.
Nine times out of ten, the price of the index will be found by adding together the value of all of the companies and then dividing by the number of companies within the index. Using the S&P 500 again, it is easy to understand how that one’s price is determined: Add up the companies’ prices, divide by 500.
Going outside the S&P 500, most indexes are made to track industries. There will be an index for consumer technology, automotive production, agriculture, and so on.
Now, you probably already know the common parlance of “fund”. As a noun, it means an amount of money set aside for a purpose. As a verb, it means to supply money to a purpose. These are important definitions to know, but it means one more thing in the context of investment.
A fund when it comes to an investment is still an amount of money set aside for a purpose, but that amount of money is usually not the product of a single person. The easiest example is the “mutual fund”. This is a sum of money assembled by shareholders for an investor to invest on their behalf.
In this situation it is critical that a fund not just be a pile of disorganized money. The more money that is involved, the more organized it should be through contracts and planning. A fund has to have a purpose to exist. And further, it should stick to that purpose and be beholden to that purpose. If a fund is used in any way that the shareholders did not agree to beforehand, then it runs the risk of being called fraud.
Now that you understand indexes and funds it will be easy to grasp what an index fund is. When you invest into or create a fund, you need a plan for what to do with that fund. An index provides an easy template for how to develop that plan: Simply invest money into the index.
Many indexes are created for expressly this purpose. There are indexes that follow financial advice gurus such as Jim Cramer. There are also indexes that do the opposite of the advice Jim Cramer gives. One fund even works to make similar investments as Nancy Pelosi, speaker of the House of Representatives.
Once you know how to use them, Index funds are a low-risk way of growing your money over time. But even if you assume all of the indexes and index funds you can invest in are perfect (they are not) some will be better than others. So, we are going to go over the top 7 best index funds out there for you.
This index fund is easy to recommend, as it has no expense ratio. What is an expense ratio? It is one of the most important factors to consider in your calculations of how much an index fund is making you.
Essentially, every index fund and exchange traded fund (also known as an ETF) will have an expense ratio. This will be represented as a percentage, though it will rarely be above 1 to 5%. Think of this as a commission fee to the organizer of the fund. Remember, someone has to pick what goes into the index.
Fidelity ZERO is easy to recommend because it has the authority of Fidelity Investments, but no expense ratio (that is why it has the “ZERO” moniker). The “large cap” part of the name comes from the fact that it is an index of companies with large market caps. This is a good time to explain market caps.
Market cap means “market capitalization”, and essentially denotes the value of a company’s stock multiplied by how many shares exist in the world. Apple currently has the highest market cap in the world despite having far from the highest individual stock price, simply because more shares exist.
Fidelity Zero Large Cap Index, therefore, is an index fund that does not cost you any of your investment to maintain and focuses on large companies with reliable market capitalization.
One of the things that surprises most people about the Fidelity Zero Large Cap Index is that many of the companies in it do not pay dividends. This means that it has some issues with being an income stock.
On the other hand, it also has so many companies in the index that it is not very valuable individually. The fractions of shares held by the index are small as well, meaning that an increase in any given company’s price is not going to translate into the index going up by much, limiting its day trading use.
Basically, it is a good index fund for making money slowly and reliably. But you would be hard-pressed to find a way to make a lot of money off of it.
No one has to tell you that it is good to invest in the S&P 500. But not all S&P 500 index funds are created equal. Some have greater fractions of shares, giving them a higher price, while others have a lower expense ratio. Schwab has a uniquely cheap S&P 500 fund due to having a .02% expense ratio.
Squint at that number real quick. It is not an “expense ratio of .02”. It is a .02% ratio. What is the difference we are trying to emphasize?
Well, an expense ratio of .02 is marketing speak for “2%”. People are so used to seeing this that they assume that .02% means 2% when it really means 1/100th of that.
An expense ratio of .02% means that for every $100 you make off of the Schwab S&P 500 Index Fund, you will pay two cents in administrative fees to the fund. That is a pretty good deal for such a reliable fund. And it is reliable: We treated the S&P 500 as an obvious investment for a good reason.
Companies leave the S&P 500 every day, but those that are at the top of the index have historically been dominant for decades. That means no matter when you invest, you have a good chance of making a large amount of money over time.
Currently, many armchair investors like to point out that the S&P 500 is made up primarily of tech stocks. What is the problem there? Tech stocks have been booming nonstop for decades.
Well, that is exactly the problem. What goes up must come down, and people are concerned tech stocks will crash hard. While this is an opinion regularly espoused by people who do not have much trading education, it is gaining more and more credence recently as supply chain issues prove that tech companies are not infallible. At the very least, they are overvalued. At worst, they are scams.
While some people are skeptical about tech companies, the main way to craft a “sure bet” in the stock market for the last two decades has been to invest heavily into one or more of them.
The Shelton NASDAQ operates off of this logic. There are two things going on with how the Shelton NASDAQ works. The first is that it expects the tech industry, as a whole, to continue to grow. The idea is that the tech industry solves certain problems, and these problems are not going to go away.
For the last 20 years the tech industry has found more and more problems that it is capable of solving. One might even argue that it has created some of these problems, but that is a purely academic argument. As long as there are problems to solve, the tech industry will still be able to expand.
The second thing going on with this index is the presumption that companies will grow to capitalize on the opportunities created by solving those problems. New users of phones and computers are born every day. A tech company has to increase production to match that expanding marketplace.
Even if you knew that the tech industry was always expanding, now you might have a better idea of why index funds like the Shelton NASDAQ are good investments in both the long and short term.
But of course, we run into the same problem as before but even more so. Due to being focused so much on tech companies, the Shelton NASDAQ index is given to recession. If the tech industry can’t get a hold of copper or plastic (which is a big concern over the next ten years) then it can’t solve any problems.
If there is a famine of corn, then most of the agricultural industry would suffer, but not all of it. If the world’s supply of OxyContin rotted on the shelves, there are alternatives. But there are so many similarities in the way different tech companies work that if one falls, they all fall.
And as diverse as the companies in the Shelton NASDAQ are, they are given to that unlikely event.
Investing in growth industries is how you turn small amounts of excess income in the first half of your life into comfortable living in the second half of your life.
The Vanguard Growth ETF is focused on growth industries. But what is the difference between a growth industry and a non-growth industry?
A non-growth industry is unstable. One year will see an amount of growth in profits and business size, while the next will see a smaller amount of growth. Bad years will lead to shrinkage. Most compromising of all though is when an industry struggles to find new problems to solve, as discussed up above.
A growth industry is a far more stable investment. Each year sees growth, and while no year will stand out as an exceptional boom (barring a significant event) the growth will get larger as time goes on.
The Vanguard Growth ETF is not just focused on an individual growth industry either—most indexes that do that end up looking at tech for reasons we already mentioned. It looks at companies that are growing within several different growth industries, focusing on the problem solvers rather than the problems.
This does a lot to make sure that the index pays out in the long run, while still having potential for exploitation in the here and now due to most companies paying good dividends.
Due to containing fewer companies and usually larger companies, this index has a higher barrier of entry as far as share price goes. It is also relatively stable in its price relative to how much it costs.
How is being stable a drawback? Well, it’s definitely an advantage for most kinds of investments. But for people looking to make a quick buck or get rich fast, instability is the way to go. You are never going to win the lottery by investing into this index. It just never goes that low or shoots up that high.
Something that we have mostly glossed over is how index funds deal with being funds as much as being indexes. While most index funds are designed to be taken on by individual investors, plenty allow you to pay into a fund operated with multiple investors, sometimes dozens or even hundreds of other people.
The Invesco QQQ Trust ETF is one such index fund. The idea here is that Invesco, a hedge fund, manages the fund. This allows them to do more with it than just let it sit around accruing value and dividends.
Most people who make money off of day trading do so by buying a stock when it is low and selling it when it is high within the same day. This is old news to most people, but the thing that most people forget when they think of day trading is the fact that it actually takes a lot of time out of the day.
Index funds like this are great because it delegates the task of making those trades to the hedge funds that manage them. They are not just getting value out of an index passively; they are actively trading to make their money back and reinvest it when things are cheap again. It is simple, but profitable.
And of course, they do this using fractional shares of the NASDAQ top 100, because why not?
Not everyone is comfortable letting a hedge fund trade with their money. It is not an issue with Invesco in particular. It is an issue with the way hedge funds have behaved without much consequence in America. People, especially people coming from less than $100,000 of capital, have ethical concerns.
If you take issue with the greater infrastructure of hedge funds and their potential for securities fraud, then there is not much any given hedge fund can do to assuage your concerns. Invesco is generally seen as harmless, at least as harmless as a multi-billion-dollar hedge fund can be naturally.
Generally speaking, there are two kinds of investment methods: Growth investment and income investment. This is very generally speaking, as it basically boils down to how you want to make money.
The SPDR S&P Dividend ETF is focused on income investment. But what does that mean? Well, growth investment means you are putting money into a company anticipating it will grow over ten to fifteen years. The idea is that your investment will pay off when you sell your holdings way down the line.
Income investment is a different story. You can still make passive income off of income investments, as is the case with SPDR, but you can also day trade. We described day trading up above, and if you remember that, then you may also remember that day trading is reliant on a stock being a little volatile.
That volatility is what attracts most people to day trading, as it presents the opportunity to make a lot of money in a short time. However, while the SPDR does support that kind of income investment, it is not focused on it. They give you access to companies with good dividends instead.
Dividends are earnings you get just for holding onto a stock. Some come once a month, some come once a year. But some don’t come at all, as is the case for Amazon and Tesla. The SPDR is an index of the S&P 500 companies that actually give out dividends, making it a great index for income investment.
The main issue with SPDR is the skill it takes to operate it. While it is managed by a hedge fund like the Invesco fund, they do not day trade on your behalf. That means, if you want to get that kind of money out of it, you will have to day trade on your own time with your own expertise.
Anyone who has spent more than a day in the stock market will tell you that endeavoring to do that will put you on a rocky road. Volatility means risk, and risk is antithetical to most people’s ideas of trading.
One of the greatest things about capitalism is the fact that the stock market brings together millions of people who are all, individually, only interested in forwarding their own personal financial freedom.
Everyone gets rich, but no one is working together. It is amazing that it can even happen.
The iShares Core S&P 500 Fund is managed by a company that essentially sits at the crossroads of most of the financial activity in the United States: Blackrock. That might sound like an exaggeration, but through mergers and acquisitions, Blackrock has found itself owning most of the land in the country.
Not only that, but they have control over more companies than any other privately owned conglomerate in the world. That means they are a huge mover in the economy. If you want to know what is special about this index fund, it has nothing to do with what they are investing in or how they are investing in it. Both of those things pale in comparison to the force of the company behind them.
Blackrock is a massive company that is investing big in the top of the S&P 500. Its shares are larger, its dividends bigger, and its expense ratio narrower than almost any other index fund.
With all of that excitement around Blackrock, why isn’t this index fund higher on the list? Well, it starts with the fact that it has a steeper barrier to entry. But more importantly, it only falls under Blackrock’s sway due to a merger from years ago. That means it is not a focus of theirs or anything.
It has recently seen an increase in profits for its shareholders since that merger though, so there’s that.
The real issue that might keep people away from this fund is the fact that Blackrock’s size means it is begging to be regulated. And indeed, there are regulations that clearly apply to it that it is not respecting and could be litigated at any time. The only thing preventing that is that no judge would take the case.
Is it better to rule through love or through fear? Blackrock rules through both love and fear of money.
Now that you know some of our preferred index funds, let’s go over some common questions.
Some high rollers will laugh at this number, but you can get started in an index fund just putting in $50 a month. You can go lower than that, but $50 a month is when you start to build a meaningful retirement fund. You are not going to get an income out of anything shy of $1000 a month though.
We mentioned this a couple of times, but we will clear it up here. Some index funds are day traded by the hedge funds that manage them. They will tell you that this is happening, so don’t worry. You will not put your money into a risky fund without your knowledge.
For the most part, your money will go into a pool with everyone else that is contributing to the fund. The investor managing it will make the investments and pay out the returns in accordance to how much each person invested into the fund. Higher paying shareholders will get more, but you will always get something good as a means to attract people to put money into these mutual funds.
This is a hard question to answer, as it requires a degree of nuance. Yes, index funds are risky. But reducing the answer to a yes or a no is not helpful, as all investments are risky. The real question is, “Are index funds as risky as day trading options?” The answer to that is a firm no.
The risks involved with index funds are much less because they deal with securities that are naturally more stable. Stocks do not have the ability to lose infinite money like options do. Not only that, but the stock market as a whole is expected to grow as the human race grows.
That means the natural diversity of assets that index funds bring are even less risky.
There are lots of index funds to choose from and lots of ways to invest in them. But if you are going to take the plunge into them, remember that they are meant to make money slowly.
You should make investment goals for yourself in order to grow your skills. But make sure these goals reflect how much index funds are designed to pay out. Otherwise, you might get impatient and pull out before they can yield you anything. Or worse, sell them off in a panic.
The goal is to make money over time, little by little. Index funds are better for that than getting rich quickly.
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