You may know the importance of investing. Yet as a busy parent, the idea of it can seem incredibly overwhelming – even scary.
Between the fear of losing the family’s money, the complexity of the stock market, and the amount of time it seems like it takes to do it properly, it’s no wonder that so many people avoid investing entirely (outside of the 401K or IRA contribution dealt with through your employer.)
However, it doesn’t have to be this way.
Learning to pick stocks properly takes a lot amount of time, but there’s a better way – a method of investing that’s extremely popular, requires very little financial knowledge, takes almost no time, and you can get started with in under an hour.
It’s called index investing, and I’m going to explain why it’s so valuable in this article.
What Is Index Investing?
You may have heard about how stocks work before.
Stocks are essentially fractional ownership, or ‘shares’ of a company. This means that you are entitled to a percentage of the company’s earnings, based on how many shares you own.
Index funds are made up of a bunch of different stocks (or other assets) all at once – you can think of them as if they were a bucket of stocks.
Instead of spending money on a few shares of say, 10 different companies, you could instead buy a fraction of a share in hundreds or thousands of different companies all at once.
This saves you from…
- Having to pick and choose which stocks to invest in, which takes a lot of time.
- Transaction fees that you’d have to pay from buying a bunch of different stocks.
- Having your investments tied up into only a few companies – which would dramatically increase your risk.
If you need further convincing, you should know that 99% of professionals who spend all day doing this for a living, fail to consistently beat index funds in terms of return.
There are hundreds of possible index funds to choose from, but most people only need to be invested in less than five.
We’ll go more into the benefits of index funds later, as well as how to choose which to consider. For now, just remember that index funds are like ‘buckets of stocks’ that you can buy all at once. It’s also worth noting that if you’re investing through a plan set up by your employer, it is likely already set up in index funds or something similar. The rest of this article is geared towards people who want to invest extra, or invest outside the scope of their employer.
Why Isn’t Index Investing Talked About?
If you’ve flipped through the finance channels you’ve visited websites about investing, you may not have heard that much about index investing.
It’s kind of strange isn’t it? Considering that it is one of the most popular, and profitable investment vehicles around.
Put quite simply, there are a couple of reasons for this.
First of all, these companies are built to encourage you to consume as much of their content as possible. That is how they get paid. They need you to think there is some secret trick, some new hot stock, or some insider information that you’ll be able to use to your advantage. Because index investing is set-and-forget-it for the most part, it goes against their interest for financial publications to encourage it.
Let alone the money lost on all those transaction fees, that you’d have to pay picking stocks individually.
The second reason is that indexing is so simple once you get started, that there simply isn’t much content to write about. You don’t have any big decisions to make all the time, and nothing ever really changes.
(Let’s be honest, parents have enough to worry about each day anyway.)
What Makes Index Investing So Great For Parents?
Well, I’m glad you asked! Having worked with many mothers and fathers wanting to invest, but not knowing where to start, these are the reasons I often recommend index funds above everything else.
1. You’ll Almost Certainly Make More Money
And this one is a good enough reason on its own.
Whether you’re trying to save for retirement or build a hefty nest egg to pass down to your kids, index investing is the best way to do it.
Research shows that less than 2% of professionals will fail to beat the market index consistently.
We’re talking about people who studied this, spend all day working in this field, and have access to data and resources that the normal person simply doesn’t.
Picking stocks can be fun. Some people find it a rush. But financially, it just doesn’t make sense.
2. Picking Stocks Takes Time, But Index Funds Don’t
And if you want to get close to beating index funds without relying on luck, it takes a lot of time.
Stock picking is a skill, and if you’re not constantly up-to-date on what’s going on, than you’re at a serious disadvantage. Not just with the stock market itself, but with the economy, the individual companies you’re looking at, their competitors, their industry, the global news…
It’s a hardcore lifestyle few parents have time for, especially while their children are young. And yeah, you don’t have to be that dedicated to it, but it’s still time that doesn’t need to be spent.
Index funds on the other hand are simple. You allocate a percentage of your total investment to the index funds of your choice, and you use that to make all of your investment decisions.
Personally, I spend less than 15 minutes per month on the whole process.
3. There Are Almost No Fees
Now you may be thinking, couldn’t you just have someone manage all of this for you?
And the answer is yes. The problem is, it’s almost never worth it.
Just like picking stocks on your own is likely to be a losing bet, passing it off to someone else may be even worse. Why? Fees.
The average expense ratio (or fee) for actively managed funds is around 0.71% of your total holdings, where as popular index funds have fees as low as 0.03%.
To see the difference, let’s look at an example. Let’s say that you invested $50,000, and received a 10% return each year before the fee was taken out. Here is what you’d have after 30 years:
0.03% Expense Ratio: $865,359.88
0.71% Expense Ratio: $718,427.23
That is a difference more than $145,000!
With investments – especially over long periods of time, small differences like this become very significant.
Another point worth considering is that many brokerages charge transaction fees each time you buy or sell a stock, with the average being $8.90.
Keep in mind that you pay this fee twice – once when you buy, and once when you sell.
Unless you buy many shares at once and hold onto them for a lengthy period of time, these fees quickly eat into your total return.
Index funds on the other hand usually have no transaction fees. This means you aren’t penalized if you only want to throw in $100 one month, or you need to sell a little bit for whatever reason.
4. The Risks Are Much Lower
Typically speaking, the risks involved with index investing are much lower than when picking individual stocks, especially if you invest in broad market indexes rather than very specific ones.
The reason for this is simple – diversification.
When you hear about people losing it all in the stock market, it is always because they invested too much of their portfolio into the same thing. It could be a single stock, or a group of stocks in the same sector.
When you invest in the market as a whole, you are protected by this. Yes, there are still crashes and years where your investments drop, but the market has always recovered.
In the case of index funds, your biggest risk is yourself. You must be prepared to stay invested in the market even during the downtimes, and ride it out until the market fully recovers – which historically, can take years.
This isn’t to say that it is completely safe – no investments are. But because your investment is spread out over hundreds or thousands of companies across all different industries, it is practically impossible to lose it all.
And if you have, that means the entire world has collapsed, and you have much bigger problems to worry about.
My Personal Portfolio, And How To Get Started Building Yours
As mentioned earlier, I’m happy to share my own personal portfolio here for you to review. Feel free to copy it or modify it to fit your needs. We’ll talk more about how to make your own choices in a little bit.
Note that my portfolio is in ETFs, which are essentially the same as index funds in terms of their underlying holdings (both track a market index), but the two are traded a little differently. For more on the differences between ETFs and index funds, click here.
My Personal Portfolio:
Vanguard Total Stock Market ETF (VTI): 58%
Vanguard Total International Stock Market ETF (VXUS): 25%
Vanguard Real Estate ETF (VNQ): 7%
Vanguard Total Bond Market: 10%
It should be noted that BND and VNQ are not stock funds. BND is a bond fund, and VNQ is a REIT fund.
While VNQ (or REITs in general) are not all that important for a portfolio, bonds are. To learn more about how bonds work, watch the video below:
How To Build Your Portfolio
Crafting your own portfolio of index funds only requires you to make a few decisions.
The first is what percentage of your portfolio that you want to have in bonds. Because bonds are more stable (but typically earn less than stocks), they are useful for managing your overall risk tolerance.
Most people increase the percentage of their portfolio that they have in bonds as they get older. This is to help ‘lock in’ their earnings, and prevent potential downside in the event of a stock market crash. If risk doesn’t bother you as much or you have a very long time before you retire, it makes sense to keep your percentage of bonds low. Many people use their age as a benchmark.
For example, if you were 35 years old, a good rule of thumb would be to keep say, 35% or 25% of your portfolio in bonds, then increase it by 1% every year until you’re retired.
The next decision is choosing what percentage you want in U.S stocks, vs international stocks. For most people, 20-35% is a common choice.
My personal preference is to have the majority of your portfolio invested in a total U.S. stock market fund, a total international market fund, and a bond fund.
The final decision is choosing who to use as your brokerage. Personally, I use and recommend Vanguard. They are a non-profit have some of the lowest fees in the industry.
After making an account, you will need to verify your information from them. From there, it’s just a matter of transferring money and choosing your funds.
Note that index funds often have minimum investments. With Vanguard, many of them start at $3,000. If you choose to purchase the ETF versions, the minimum is one share.
Some people wait to begin investing into the stock market until after it crashes. This is usually a bad idea. Nobody is able to time the market or predict with certainty what’s going to happen.
As they say, ‘time in the market beats timing in the market’. In other words, get started as soon as you can.
Investing is one of the most important things you can do to secure not only your own financial future, but have a large inheritance to pass on to your children as well.
While investing can certainly be quite complicated, investing in index funds is one of the simplest ways to do it. Not only will you be able to spend more time with your children vs studying stocks all day, but you’re prone to far less risk, and will almost certainly make more money as well.
I hope that you’ve found this article helpful. Of course, if there are any questions that I can answer for you, all you have to do is ask!
This article only reflects my personal opinion / strategy and should not be considered investment advice. I am not a licensed financial professional and can only speak based off of public data and my personal experience investing for over 10 years. All investments bring a risk of loss and this advice is not tailored to any individual people. This article is for general informational purposes only.