For instance near as I can tell it takes like 10 grand to get into an index fund. Even if that didn't represent years of savings for most families there are so many things that 10 grand needs to be used for before [[2-5%/y return on investment over 20-30 year period IF the market doesn't crash shortly before you need to start drawing on it]] is a compelling proposition
> Give the choice of waiting 40 years for not a huge payoff or gambling your 5K-10K of savings for a potential 10x return in a year or two, it's easy to rationalize the latter.
Indeed. For someone who can save $25/month, if they invest it on an index fund for 40 years, assuming 8% average/year, by the end they have about 87K. Adjusted for inflation 40 years from today, that's won't be much money.
So if you all have left is $25/mo, it's almost more rational to buy lottery tickets with it. Sure you'll almost certainly never win but the investing won't get you much either.
To quote: "What is left unsaid is that if the broad market declines 50%, index funds also plummet 50%." The article is just stupid. If someone doesn't realize that the index funds will go up and down based on the very market they're indexing, and that all markets go up and down all the time, maybe that someone should just consume their money so that people with more wits can take better care of them.
Who would be such an idiot to claim they're "safe" in the first place? Any investing is never "safe": you can always risk losing part of your money, even if you invest in a house. Not investing your money isn't safe either.
Indexes can certainly dip for years: that's why you manage your risk and only invest money you don't need that much so that you don't have to cash in your investment during bad times. As long as the economy grows the growth will eventually be reflected in the indexes. Even a single 10-year period with a common stock index lower in the end rather than in the beginning would be, in practice, a rare occasion. Most depressions are over in a few years. Some continents can tank longer but you will want to buy indexes from different areas of the world anyway. Or you can only buy your local indexes, making sure you will yourself go up and down with the indexes you buy.
An index will grow a few percent annually in the average, compounded. This is over decades which imply bad years and very good years. To buy the most passive index funds that have the smallest operating costs and letting your money sit in there is more and more likely to beat active funds and individual stock picking simply by waiting for the years to go by. Any costs saved by skipping active management fees or stock transaction fees will accumulate into your earnings instead.
> put that same $40,000 in an index fund that got the stock market's historical 7% average, and waited 30 years, I'd have $308,000.
stock market isn't a very safe investment (that is, risk is much higher than putting in a bank), you can't make a comparison against buying some equipment, which is zero risk. A closer comparison is putting the $40,000 in a bank that guarentees interest (or treasury bonds, which is also pretty much risk free like a bank) - you'd get $99,457, which is $59,457 over your initial investment.
>If I put that same $40,000 in an index fund that got the stock market's historical 7% average, and waited 30 years, I'd have $308,000.
Are you doing the math all in present dollars? Because the return is 7% after inflation but >10% before. So you'd have >500.000 in 2047 dollars. In this case it's important to do that adjustment because you're doing an investment upfront for payoffs over 30 years so the value of money adjustment is extremely important. It should only make your case stronger though if you haven't done that yet.
> if you have over 10 million dollars, [...] throw it all in an index fund.
Close to what I'd do. I'd first consult an expert about asset protection, then get a modest house and a different-city apartment, and then put everything remaining in three index funds (ITOT, IXUS, and a little AGG, or equivalents).
> I'm not comfortable investing the entirety into an index fund, given the current socio-political climate.
The government is printing an awful lot of money right now.
Keeping your money in cash isn’t a guaranteed return if inflation goes up significantly. You’re much better having it in assets with intrinsic value. (Stocks, real estate, etc)
I would suggest investing the money over the course of a couple years into an index fund, probably S&P 500 or total market.
Even if you invest at the worst possible times (right before crashes) you’ll come out way far ahead of leaving it in cash.
>Most investors would be better off buying index funds - so you seriously have to enjoy this for it to make sense.
Data point of one but a friend of mine retired and got into angel investing. I guess he pretty much got out of it after a few years and I got the sense that he'd have done a lot better just in an index fund.
He does still do some angel investing but just for a few companies he feels especially strongly about.
> I'm not comfortable investing the entirety into an index fund, given the current socio-political climate.
Over the the long term there is not really anything better to do with it than equities: the Great Depression, World War 2, gold standard retirement, 1980s inflation, etc. Even if you only invested in the peaks, you'd still do quite well over the decades:
Certainly better than sitting in cash. If you're worried about volatility, then also invest in some bonds funds: 60% stocks, 40% bonds? If you want more growth, 70/30 or 80/20 maybe.
And while the S&P 500 gets a lot of the press, a total market fund is what Vanguard is steering their own employees to:
I meant to put money in index funds right now. Not ongoing investment over a long time.
And going back further to my original point, if I had money in funds now I'd move it to Money Market accounts because the risk of a stock market downturn is big (1987/2001/2008 style). You are not Soros/Buffett/Munger or a multi-billion dollar hedge fund.
> Definitely doesn't feel like my wealth is growing in index funds fast enough to retire within this life time.
Ha ha, I feel the same. But don't discount the fact that small percentage returns are actually exponential growth. (For example, 2% returns actually doubles your money every 10 years.) Just because it 'feels' like your investments are stalled doesn't mean that they are.
> There's a barrier to entry and a requirement in regards to education that are intrinsic in the stock market.
This right here. While the audience here should be able to invest, based on income and education levels, the sad fact is that a vast majority of people have never been taught to save or even budget. I am very much in favor of self-reliance, but when you have an entire generation raised by a generation that doesn't save, what do you think is going to happen? Add on to this ever increasing prices in rent and basic necessities (food, utilities), and it's not a surprise when the vast majority of people don't own stock, even in an index fund. Shit, pensions were created over half a century ago because our grandparents couldn't be trusted to save for retirement!
I will say this: scrape together $1k USD, open an account at Vanguard and put it in a total stock market index fund. Keep putting money into it, as much as you can afford. There are other better websites out there that go into more detail, but that's the gist of it.
> If every single stock investor bought index funds
Well they don't, so why discuss meaningless hypotheticals? Yes this advice doesn't make sense in a world where there are no active funds, no wealth managers, where day trading doesn't exist, hedge funds all shut down, there are no quants, no HFT, no one trading derivatives...but until that happens I'm still telling the average person to buy index funds.
> Put everything else in index funds every paycheck, and only check your balance every now and then. Let time be on your side.
I think this is not the obvious conclusion, but a sensible conclusion. You could also, for example, buy bonds from companies that you are sure enough would not easily default. If you know nothing about shares an index fund is not a bad idea.
But, in South Africa at least, some companies have pension funds where even the broker doesn't know (or care maybe?) which shares the fund invests in. The guy at the top (that knows exactly which shares are held) are not always the cleverest or most honest. To be fair, I think these are rather mostly investment funds run by investment companies, rather than an index fund like the S&P 500.
I think once you start earning enough to invest more than just for pension, the picture changes somewhat and you could even invest in alternative things. Agriculture, for example, is a promising prospect for a richer investor, but you need to count your chickens only when they are already old and fat.
For instance near as I can tell it takes like 10 grand to get into an index fund. Even if that didn't represent years of savings for most families there are so many things that 10 grand needs to be used for before [[2-5%/y return on investment over 20-30 year period IF the market doesn't crash shortly before you need to start drawing on it]] is a compelling proposition
reply