If you're new to investing, it may feel like each new day brings a new story about someone who made a fortune thanks to a quick investment into NFTs (nonfungible tokens), cryptocurrency, or a brilliant stock purchase at just the right time.
It can be easy to feel intimidated or like you are not doing as much as you can to save for your future and to reach your goal of a comfortable retirement. These feelings are natural. I've doubted myself, even though I spent years in school earning a degree in finance. Even after nearly four years of teaching and discussing the principles of financial literacy through my podcast Popcorn Finance, I still have doubts. No matter how much you know, FOMO is real.
But the last year has proved to me that a straightforward, consistent, and long-term approach to investing through index funds is the one that will yield greater returns with way less stress. And this simple, low-cost strategy is helping me work toward retiring before the age of 50.
For so many of us, 2020 was a year of upheaval, especially when it came to our finances and the stock market. From mid-February through late March the stock market fell nearly 34% as businesses were forced to close and the economy began to slow due to the impact of Covid-19.
I cannot tell you the number of people who asked me at that point what they should do with their money. I won't lie to you and say that I wasn't nervous. But I fought through my fear and continued with my game plan: to consistently invest in low-cost mutual funds, specifically index funds.
That turned out to be a very smart move.
An index fund is a type of mutual fund that specifically selects investments that match those held within one of the most popular indexes, such as the S&P 500. The S&P 500 is a benchmark index that tracks 500 of the largest companies in the country such as Apple, Amazon, and Alphabet (Google), and provides a strong indication of how the stock market as a whole is performing.
I had heard of index funds during my time in school, but they sounded far too uninteresting to be the right investment choice. However, as time passed, I began to hear more and more about the benefits of index fund investing, most importantly their simplicity and the lack of stress they provided. I first started investing in them in 2014.
Video by Courtney Stith
Two things really tipped the scale in favor of index funds for me:
- Warren Buffett's surprising endorsement of the low-cost investment option.
- Reading "The Little Book of Common Sense Investing'' by John Bogle. Bogle, in addition to founding Vanguard, is credited with creating the index fund. Reading his work really opened my eyes to the power that existed in this simple investment product.
In addition to the variety and diversification that index funds provide, they are also one of the least expensive investment options available. They mimic existing stock market indexes, making work a lot easier, and cheaper, for the fund manager, because they require fewer trades.
Several years ago, "invest in index funds" would not have been my advice to myself or anyone else. My confidence in my plan comes from several bad investing decisions and subsequently seeing consistent results from simple index investing.
I spent my first couple of years out of college trying to make the right stock pick. The majority of the time, I made completely foolish decisions, purchasing stocks based on hunches or supposedly solid information, only to realize I was far too late to the game.
Even when I did manage to make a good guess, fear pushed me to sell at the worst time.
Within my retirement account I currently hold an S&P 500 index fund, a bond fund, which is a mutual fund that holds bonds, and a target date fund that I rolled over from a previous employer. You may be familiar with target date funds because you may have it as an option if your employer offers a retirement plan such as a 401(k).
A target date fund is easy to spot because it usually has a year in its title such as Target Retirement 2050 Fund. These mutual funds automatically adjust their investment holdings to be more conservative as you approach the year in the title, which represents roughly the year you would like to retire.
During 2020, this collection of very simple investments provided a return of 24.1% with no effort on my part. For some perspective, the S&P 500 rose 16.26% over the course of last year.
Video by Courtney Stith
Between March 15, 2020, which was about a week before the bottom of the 2020 market crash, and then March 15 one year later, my portfolio earned a return of 40.2%. That's significant, considering that I invest automatically through automatic payroll deductions.
This retirement plan was opened during the summer of 2018, and since then it has grown cumulatively by 74.4%, or 22.2% on an annual basis. These returns are not sustainable and I do not expect my investments to grow this drastically every year. However, the market as a whole averages a return of around 10% annually.
A monthly investment of $500 would provide you with about $1.14 million in 30 years at that rate. Even a more conservative return of 7% would build a nest egg of more than $900,000 with an investment of $500 monthly over 35 years.
Investing doesn't have to be complicated. A simple approach over your working career can set you up for a great retirement.
As tempting as it may be to make a big bet on an investment that your co-worker mentioned to you on your last zoom meeting or go all in on that hot NFT tip you heard about on TikTok, take a moment to pause and think things through before jumping in.
Video by Courtney Stith
I'm not saying that you shouldn't invest some money in these things if you want. It is your money and you work hard to be able to make your own decisions.
But what I am saying is that a simple, low-cost, even boring, investment strategy can put you on a path to reach your retirement dreams without the stress of becoming a blockchain expert or the next NFT mogul.
For me, that dream looks like retirement before the age of 50 and a life filled with more time surrounded by trees instead of traffic. And thanks to my investment plan, I'm well on my way.
Chris Browning is the creator and host of the award-winning, short-form podcast "Popcorn Finance" and the call-in money advice show "This Is Awkward." Chris began producing podcasts in 2017 when he created "Popcorn Finance," a podcast discussing finance in about the time it takes to make a bag of popcorn. Chris holds a bachelor's degree in finance with an emphasis in financial planning and still maintains his position as a financial analyst specializing in revenue analysis.
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