Easy Way to Invest for People Who Hate Thinking About the Stock Market
You want to start investing…
But you don’t know where to begin.
You’ve probably heard your co-workers talking about stocks around the office. They’re always buzzing about the hottest new dividend stocks and ETFs… whatever that means.
You’re not particularly interested in investing, but you don’t want to miss out either.
On the other hand, the idea of spending hours researching stocks bums you out. You don’t plan on obsessing about the latest stock trends all day.
Media has a knack for glamorizing people who wake up early to watch the markets.
And maybe because of this view on investing, you were discouraged from even trying.
You have much better things to do than waking up early to watch stock prices. Like starting the morning with a healthy workout and breakfast.
You’d rather make money with investments without putting in hours of hard work.
This might seem unreasonable, but if you’ve thought this, you’re actually on the right track. If you hate the idea of studying the market then you’re in the right place.
As a personal finance copywriter, I spend my days researching and writing about the easiest ways everyday people can manage their money. I love creating content that helps you build your wealth.
Let’s find out how to make profitable investments with the least amount of effort.
Invest Smart, Not Hard
You’re used to working hard for everything you want in life. Whether it’s in your career, school, or keeping your body in shape. But when it comes to investing, the opposite is actually true.
It’s better to let investments grow on their own with little interference.
You might also feel skeptical about stock markets. And rightly so.
90% of people lose money trading stocks.¹ But here’s the catch, you don’t have to play the same game everyone else is playing.
People lose money in the stock market because they make risky investments to “beat the market.” They take on trades themselves or hire a brokerage firm to manage their investment portfolio.
There are ways to win with your investments without assuming the typical risk that comes with attempting to one-up the market. Consider buying index funds.
So what exactly are index funds and how do they consistently outperform actively managed mutual funds? Keep reading to find out.
What Are Index Funds?
Index funds are a type of mutual fund that can consist of stocks that track a market index. You’ve most likely heard of them in the news. What is a stock? A stock represents ownership of a company that can be purchased. For example, if you buy a stock of a company, you now own a piece of that company. These stocks can then be sold in the future for a profit (or return on investment).
Some of the most widely known index funds are the Standard & Poor’s 500 (S&P 500) and the Dow Jones Industrial Average (DJIA).
Purchasing an index fund like the S&P 500 automatically diversifies your investments since you’re purchasing a group of 500 stocks.
Index funds give investors the option to buy groups of securities at a fraction of the cost. What are securities? Securities a type of financial asset that can be bought or sold (such as stocks).
Index funds can vary by different categories such as industries, size of the companies, types of securities, and geography.
Passive Vs. Active Investing
Unlike most mutual funds, index funds are managed passively. This means that they aren’t actively managed by a fund manager.
This is because index funds simply follow the market index, rather than taking on risks to beat the market. In other words, index funds follow the market rather than trying to outperform it.
For example, if a mutual fund’s goal is to outperform the S&P 500 (which has grown at an average of 11.88% per year)- it would aim to achieve a return higher than 11.88% annually.²
Professionally managed mutual funds consistently fail to beat the market 80% of the time.³
Given enough time, index funds outperform most other investment options. Best of all, you free yourself from risks that come with stock picking or actively managed mutual funds.
Which explains the excitement from the media on anyone or any hedge fund that successfully outperforms the market.
So what advantages do index funds have over other investment options? Read on to find out.
What Are the Benefits of Index Funds?
Index funds have a long history of outperforming most actively managed mutual funds. And the best part is they have much lower fees than actively managed portfolios.
You’re probably thinking this might be all too good to be true.
Investing long-term into index funds takes you out of the short-term stock trading game that everyone else is playing.
By playing the long game, you’ll free your emotions from the upswings and downswings of daily market movements. You can simply keep investing and move on with your life.
Let’s take a quick look at the five benefits of index funds.
5 Benefits of Index Funds
1. Higher Long-Term Returns
A mutual fund may outperform an index fund over the short term. However, history has proven time and time again that index funds eventually outperform actively managed mutual funds.
A mutual fund or stocks that beat the market average one year are bound to underperform in the future- it might happen in a year, in a few years, or even five years.
While we can’t predict how long a mutual fund can continue to beat the market, history suggests that it will happen at some point.
When mutual funds eventually start underperforming, you’ll miss out on the returns you could have had with index funds instead.
Take a quick look at the chart below.⁴
As you can see, index funds (represented in green) have consistently outperformed active funds (represented in red) over the past 10 years in all three cap size categories- Large-Cap, Mid-Cap, and Small-Cap.
2. Lower Stock Transaction Fees
Opting for an actively managed mutual fund will cost you more in transaction fees. Why?
Because the fund manager will buy and sell more shares in an attempt to beat the market. And each time shares are bought or sold, there are fees associated with each transaction.
With an index fund, there’s generally less buying and selling of stocks.
Since index funds only closely follow a market index instead of buying and selling shares to beat the market. Naturally, fewer transactions take place (compared to actively managed funds).
As a result of lower transaction volumes, you’ll save money on your transaction fees.
2. Decrease Capital Gains Taxes
In addition to transaction fees, mutual funds also have an expense ratio between 0.5% and 1.5% per year. Whereas opting for index funds will typically cost you only 0.2%.⁵
*Expense ratios are annual fees paid to the broker to manage your portfolio.
On top of fees, any share that’s sold a year before the purchase date is taxed at a higher rate. It might not seem like much at first, but these taxes can add up quickly.
With more stock transactions, you’ll pay more in short-term capital gains taxes.
Lower your tax bill by investing long-term with index funds.
3. Lower Risk Through Diversification
Another appealing aspect of index funds is that they carry much less risk than actively managed mutual funds. Because index funds do not take on more risks to beat the market average, they continue to follow the market.
Separate yourself from the game of stock picking. Instead of putting all your eggs in one basket, you can put them in hundreds, or even thousands of baskets with index funds.
4. Save Time and Effort
Save yourself from the time and effort it takes to pick stocks or even the right actively managed mutual fund. Even if you end up with a mutual fund that beats the market one year, you might find yourself scrambling for a new mutual fund in the next.
Why?
Because it is highly unlikely for a mutual fund to consistently outperform the market year after year.
By investing long-term with index funds, you’ll free yourself from
- Constantly following up with stock prices
- Worrying about which stocks to buy and sell
- Shopping for a better mutual fund
Instead of filling your mind with boring financial news, you can ignore all the noise and get on with your day. Profit from your investments without the stress that comes from risky mutual funds and stock-picking methods.
3 Simple Steps To Start Investing With Index Funds
1. Budget & Save Money for Investing
Creating a budget is essential for building wealth. The more you save, the more you’ll have available for investing.
If you’re new to budgeting, try the 50–30–20 Rule of Thumb. The budgeting method is quite simple. It’s broken down like this:
- 50% of your income goes to what you need
- Spend 30% on things you want
- Save 20% for emergencies and investing
Out of the 20% you save, you might want to put away at least 10% to purchase index funds.
2. Pick an Index Fund
Once your budgeting is set in place, it’s time to pick an index fund. With index funds, you have the option to play it as safely as you want.
But if you’re young and willing to take on more risks for higher returns, that’s another option. It all depends on your financial goals.
If you’re in your 20s or 30s, taking on more risk for higher returns is common. If that’s the case, look into popular indexes like the S&P 500 and Dow Jones Industrial Average (DJIA).
Both of these index funds are known to have an average annual growth of over 10% in the past 10 years. superscript⁶
The idea is that you continue to invest year after year, decade after decade into stock index funds. This will give your investments enough time to grow. Constantly selling off your investments early on will short-circuit their potential for growth.
3. Open a Brokerage Account
After picking your index fund, open a brokerage account. A brokerage account is required to buy index funds. You can easily open one with most banks like Wells Fargo, Chase, and U.S. Bank.
Or choose to open a brokerage account outside of your bank. Some popular brokerages are Vanguard, Charles Schwab, and TD Ameritrade.
Once your brokerage account is open, you can set up a direct deposit with your employer to automatically transfer 10% of your paycheck into your brokerage account- or any percentage you prefer.
This way, you’ll have funds automatically deposited and ready for investing.
*Disclaimer: I was not paid to recommend these brokerages. These suggestions are based on my own research. I will not make any money should you choose to bank with any of the accounts mentioned above.
Image by @raimondklavins
Make Your Money Work For You
It’s time your money started working for you. Leaving cash in your savings account won’t build your wealth. Especially since the dollar loses over 8% in value from inflation annually.⁷
By investing in index funds, you can secure your wealth by allowing your money to grow consistently. The best part about index funds is that they give you the freedom to make the process of investing simple and automatic.
Make money by investing without spending hours on research. Open that brokerage account today, and automate the investment process.
Build your wealth while spending your time on what matters most! Like going on epic trips with your friends or simply finding more time to relax throughout your day.
I know that getting into investing can feel overwhelming. But the key to success is starting early. So take your first step towards investing by picking an index fund and opening a brokerage account.
References/Sources
- “As much as 90% of people lose their money in stock markets, and this includes both new and seasoned investors” Taylor 2022
- “New report finds almost 80% of active fund managers are falling behind the major indexes” Meyers 2022
- “Investment Data | Mutual Fund Databases”, n.d.
- “S&P 500 Growth | S&P Dow Jones Indices”, n.d.
- “Trends in the Expenses and Fees of Funds, 2021” Investment Company Institution (ICI) 2021
- “Dow Jones — DJIA — 100 Year Historical Chart | MacroTrends”, n.d.
- “Current US Inflation Rates: 2000–2022” U.S. Inflation Calculator 2022
