Index Funds: The Zen Way to $1.000.000+

On my About Me page, I talk about how I discovered Index funds almost a decade ago. The promise was a worry free, high return investment approach.

This Article will set you up for a fundamental understanding of this investment type.

You will be set up in 3 Weeks starting to invest in index funds. If you dont feel comfortable enought yet, you will find additional information about this topic at the end of the article.

Uncovering the Lies About Investing

Throughout my life, I’ve heard many incorrect things about investing, like that it’s only for rich people and that you must understand a lot about financial charts.

Also, when it came to investing, my family and friends made me afraid of the high risk and possible loss. But the truth is that investing in index funds is easy. It has much lower risk than buying a single house or stock and could bring in a lot of money in the long run.

Understanding Index Funds

When I started investing for the first time, I felt like I could make so many mistakes. But once I understood what index funds were, everything made sense. So, what do index funds really do? Why do they stand out so much?

Index funds are a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index, such as the S&P 500.

They don’t try to beat the market by picking individual stocks; instead, they try to match the market’s performance by holding a diversified portfolio that looks like the chosen index.

Their best features are that they are easy to use, offer a wide range of companies to be invested in at once, and are inexpensive. Index funds have significantly lower expense ratios than actively managed funds because there is no expensive management to be paid.

It makes a huge different if out of a 8% market return, you get 7,9% or just 5% because the fees are 3%! Test it yourself using the ETF Savings Plan Calculator and choose a 35 year time horizont. It will blow your mind!

What was shocking to me was, that due to their high fees, actively managed funds do worse than the market (= index funds) after as little as 10 years.

There is a great book called “Where are the customers Yards?” debunking the poor perfomance and crazy high fees of active managed funds as the author wonders about the huge yards owned by fund managers in the harbour of New York City.

Putting your money into index funds is the best way to invest for the long term. Period.

Where to find these ETFs?

Understanding ETFs can seem overwhelming at first. It’s essential to focus on key factors.

JustETF is a great choice because they have a huge database of ETFs and explain everything very clearly.

Once you sign up, you can compare the past performance of different funds and also get suggestions for how to allocate your portfolio. You can then just copy these to your broker platform, and you’ll be on your way to being financially free.

How Much Should You Invest?

When making investment goals, it’s important to think about how much you need, like becoming a millionaire.

Using the ETF Savings Plan Calculator can help you figure out how much you need to invest each month to reach your goals.

For example, putting $250 away every month and getting 8% back every year for 42 years, you can make more than a million dollars from this. Adding ten more years to the investment period can earn more than two million dollars.

Increasing the amount you invest each month can speed up the process of getting rich even more. It’s important to look at your own financial situation and think about investing more money.

If you aim for an additional income to live off when you are retired, take your aimed annual withdrawal (Example: 12 x $2.000 = $24.000) and divide it by 3,5 x 100. You will come to $685.714. That’s the amount from which you can safely withdraw 3.5% annually for 30+ years.

How much return can I expect from my Investments?

Below you find an overview of the most relevant asset classes available. The S&P 500 Index is outperforming almost all asset classes/Indexes with the exception of the Emerging Markets. However, for this Index we only have 36 years of data available.

Overall, the longer the historic set of data available, the higher the certainty that this asset class or Index will continue to perfom the historic average return, also in the future.

Asset Class	Long-Term Average Return	Time Horizon	Years of Data
S&P 500 Index Fund	10.2%	1926	98
MSCI World Index Fund	7.2%	1969	55
MSCI Emerging Market	11.5%	1988	36
MSCI ACWI	8.3%	1987	37
US Real Estate	9.5%	1971	53
US Bonds	5.0%	1926	98
Global Bonds	5.3%	1990	34

If you plan for retirement, depending on your age, you have to have a solid investment strategie for at least 35 years in addition to probably another 35 Years where the money has to last before you pass away.

That’s a long time and we must ensure to invest in something that has a solid history of good performance.

A good example what NOT to invest your retirements into is Bitcoin. The Historic perfomance is unbeatable (+2,000%), but the historic data points of a little over 15 year bears a huge risk for our 70+ Year investment strategie that this is just a one-hit wonder that wont last.

Do me a favour and play with these average returns using the ETF Savings Plan Calculator and choose a time horizont similar to the time you have left until retirement. It is very benefitial to get familiar with what 10.2% over 35 years can do for you.

I close this article with an example investment strategy

Investment Strategy Example

Let’s consider an example investment strategy for allocating $10,000 in index funds:

1. Assess Your Goals and Risk Tolerance:

Determine your financial goals (e.g., retirement, buying a house) and your risk tolerance (conservative, moderate, aggressive).

2. Diversify Across Different Index Funds:

Allocate your investment across various index funds to diversify your portfolio. For instance:
- 60% in a Broad Market Index Fund: Invest $6,000 in a fund tracking the S&P 500 to cover large-cap U.S. stocks.
- 20% in an International Index Fund: Invest $2,000 in a fund tracking international markets (e.g., MSCI EAFE) for global exposure.
- 10% in a Small-Cap Index Fund: Invest $1,000 in a fund tracking small-cap U.S. stocks for growth potential.
- 10% in a Bond Index Fund: Invest $1,000 in a bond fund for stability and income.

3. Consider Tax-Advantaged Accounts:

If applicable, use tax-advantaged accounts like IRAs or 401(k)s to maximize tax benefits. Contribute part of your $10,000 to these accounts if they align with your financial goals.

4. Automate and Rebalance:

Set up automatic contributions to ensure consistent investing. Periodically rebalance your portfolio to maintain your desired asset allocation.

5. Monitor and Adjust:

Regularly review your portfolio’s performance and make adjustments as needed based on changes in your financial situation or goals.

Conclusion

By applying what you have learned in this blog post, and by checking out the links and starting to make your own thoughts about this, you will find your way to index investing. Make your life a priority.

Make your life a priority.

Yours,
Stephan