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At one point, I owned over 30 different stocks and funds spread out across retirement and investment accounts.
Through all my efforts, I had basically created a giant global index fund with one key point of difference — I was wasting thousands of dollars in annual mutual fund fees. Make a quick spreadsheet of all of your funds called portfolio makeover include funds from your company 401(k) or 401(k) rollover accounts. This article is going to provide a comprehensive overview on why and how to invest in index funds. In an actively managed mutual fund, the fund manager is trying to meet a certain goal, such as wealth preservation or to try to beat the market. In a passive mutual fund, called an index fund, the collective wealth of the investors is passively managed by the fund manager to match a certain index, such as the S&P 500. The primary thing index funds have in common is that the fund manager isn’t trying to do anything other than match an index. Depending how far back we go in history to use as the reference, the average long-term rate of return of the S&P 500 is around 9% per year. To provide a tangible example, if you put $1,000 per month away into an index fund that grows at an average rate of 9% per year with 3% average inflation, then you’ll have approximately $850,000 in 20 years, and this value adjusted for inflation would be $480,000.
Index funds require no stock picking and little business knowledge, and therefore are useful for everyone that has money to save and invest. If you invest only in index funds, then you give up your shareholder voting rights to the index fund manager, since they own the equities rather than you. Gaining some knowledge on how businesses work down to the shareholder level can give you knowledge of politics and economics, can help you dominate an interview, gives you some financial knowledge for your own trials of entrepreneurship, and generally leads to financial well-roundedness. An index fund will beat most actively managed mutual funds due to the huge difference in fees. When it comes to index funds, this primarily means asset allocation between stocks and bonds, but can also include cash, REITs, MLPs, etc.
However, these differences are somewhat reduced in a more realistic scenario where new money is invested each year, which would be typical during a working career. Likewise, during certain periods such as the market bottom in 2009, it was clear to many value investors that the market was very undervalued.
The chart shows that, over a century-long period, the current market valuation is inversely proportional with the expected annualized returns over the next 20 years. Given the rather well-evidenced (and inherently logical) premise that highly valued markets offer statistically lower returns, there is a semi-popular investing method that takes this into account.
This fund invests small, medium, and large publicly traded American companies, and has an expense ratio of only 0.18%.
This fund is split between the Total Stock Market fund (56%), the Total International Stock Market fund (24%), and the Total Bond Market fund (20%).
This fund inverses the balance compared to the previous fund, consisting of bonds (80%), U.S. This fund is a bit different than the others, because the fund will shift towards bonds over time.
These funds are similar to the first group of mutual funds, but they’re wrapped in a structure that is traded on a stock exchange.
So, to be clear, I think that for 90% of the population, going with a passive and purely indexed approach is the most optimal investing method. If you’re like me, and for one reason or another you want to own individual stocks as well (because you want to retain your shareholder voting rights rather than wasting them, or you think you can beat the market with a smart investing approach, or you want higher and more consistent dividend income, or another reason), then there are some seamless ways to combine indexes and individual stocks.
Whatever target balance you’re aiming for, you have to make sure to include your individual stock holdings.

Another way to use index funds is to use some of the more targeted ones to give your portfolio exposure to certain markets.
So if you’d like some further reading on index funds, there are a few books that are good choices. Written By John Bogle, founder and retired CEO of Vanguard, this book is another concise and good read about index funds. Burton Malkiel looks through various investment strategies and shows that they will underperform a passive investing approach.
Overall, index investing is one of the most viable wealth-building strategies, especially when combined with cash and real estate. It’s the investing approach that takes the least amount of time, and although there are some drawbacks, there are plenty of advantages. In a more complicated scenario, it means keeping track of a few accounts which may include pure indexes, or indexes combined with individual stocks. Sign up for the free dividend and income investing newsletter to get market updates, attractively priced stock ideas, resources, investing tips, and exclusive investing strategies. Couldn’t agree more that the vast majority of individuals who have neither the time, nor the passion, for investing should consider an index fund investment strategy. Receive dividend stock ideas and exclusive investing strategies with this dividend stock newsletter. I would continue to stick with investing, but I would need an even more diversified portfolio, loading up on more bond funds and international funds, as well as individual value stocks. Just type in the symbol of any mutual fund you own and scroll down to key statistics you will see both expense ratios and management fees. A quick disclaimer — Any concepts presented on this blog are simply opinions and should not be considered as professional investment advice. Alden 13 Comments A balanced portfolio of index funds is one of the smartest and easiest ways for most people to invest and build wealth. I consider it the other smart long-term investment strategy besides value investing, and one that’s suitable for a wider range of people. With a mutual fund, a fund manager collects the money from a bunch of investors together and buys shares of many companies with the common pool of money.
He’s buying stock from most or all of the companies that meet the criteria of that particular index. Actively managed funds have much higher fees, and after fees, most of them provide lower returns than the market. Depending on exactly what sort of index funds you pick, when it comes to basic portfolio maintenance, you’ll spend anywhere from a few minutes per year, to a few hours per year, to perhaps a couple of hours per month, tops. Investing in index funds means you never have to look at a corporate report, never have to learn Discounted Cash Flow Analysis, never have to keep up on what corporations are doing. If you’re a value investor that believes that you can beat the market by at least a percentage or two per year (which can add up to hundreds of thousands of dollars over the long run), then you might have a better shot with appropriately valued individual stocks. So, to maintain the balance, you’d use your investment money to buy more of the stock funds to balance that out. For example, during the dotcom boom, it was clear to rational investors or economists such as Warren Buffett and Peter Shiller that the market was overvalued.
And because they were the first mover and with such a strong focus on index funds, they’re the largest player today. You can open open an account with them, and the minimum amount to invest depends on the specific fund but is typically several thousand dollars.
Apart from holding property and cash, your job as an investor here is just to shovel as much money into these funds as possible and let Vanguard do the rest.

For example, if you have a regular brokerage account filled with indexed ETFs and some individual stocks, then make sure you keep track of what you’re overall diversification is. There have been several editions, and this is one of the original books about indexing, since it even predates index funds.
One that exposes them to their desired asset allocation (all investors should know this, as well as their own personal appetite for risk). Over time, I purchased other funds, international funds, bond funds, small-cap funds, mid-cap funds, over-the-counter funds.
I could shop in a mutual fund supermarket (Fidelity was one of the first brokerages to offer access to competitive mutual funds via a fund supermarket.) This made it easier to add even more variety to my portfolio funds with names like Pacific Tiger, The Clipper Fund, California Muni.
I would follow a bulletproof portfolio philosophy and be highly diversified, adding real estate investment trusts, emerging markets and global bond funds. Not long before the global financial crisis in 2008, I also realized that many of these funds moved in the exact same direction, especially during a downturn.
Again, 10 or 20+ times the fees Vanguard charges for one of the funds that James recommends.
Rather than trying to select individual stocks, the fund manager invests in all stocks that meet certain criteria. But there are index funds that follow Bond indexes, funds that follow international markets, funds that follow the stocks of a specific country, funds that follow REITs, funds that follow specific sectors (such as Technology, or Healthcare), and all sorts of other funds.
You could double or triple these intermediate and end-values by doubling or tripling your monthly investment. By keeping fees low and merely trying to match the market rather than beat it, index funds statistically beat out actively managed mutual funds. So, to maintain the balance, you’d use your investment money to buy more of the bond funds to balance that out.
But if you enjoy investing and want to reduce or increase your equity exposure based on the market valuation, it can be a worthwhile approach that likely leads to improved returns and reduced volatility if it’s done with discipline. Due to their size, they can generally keep expense ratios below any other competitor, and because of their focus, they don’t try to upsell you to actively managed funds. In these structures, Vanguard groups together some of the funds from the previous category into a fund of funds that they keep at a specific balance.
The author, Andrew Hallam, is an English teacher that became a millionaire in his 30’s through frugality and index investing. Whenever you add more money to your portfolio (such as once per month perhaps), simply add it to the funds that are below your target allocation to balance them out. Plus, Vanguard is itself owned by its own funds (in other words, the investors), which really locks down the expenses. If the bulk of your wealth is diversified and indexed, then trying your hand at stock picking can keep your risks low. It was the hottest fund at the time, The Fidelity Magellan fund managed by the infamous Peter Lynch. If the segments of your portfolio are perhaps 5% or more out of balance despite your additions of new money, then consider selling a portion of the over-represented fund to buy more of the under-represented fund to achieve balance. Vanguard offers these funds in five-year increments, so you pick the fund that corresponds to your expected retirement year.

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  1. 562, 18.07.2013
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  2. ELSAN, 18.07.2013
    The groups match up to each other, and ignore the forward Brandon Prust.