You don’t have to be The Oracle of Omaha to build wealth from the stock market. You don’t need inside information. You don’t need to waste time reading financial statements. And you certainly don’t need to pay expensive fund managers to lose your hard earned money.
In fact, you can generate modest returns (above 10% per year) that beat over 90% of Wall Street professionals, and you can do this without even picking a stock.
How is this possible?
By using a strategy known as Index Investing!
What is Index Investing?
Index investing is a strategy that uses a low-cost, passive approach to investing in the stock market. Instead of investing in individual stocks or hiring expensive portfolio managers to pick the stocks, you invest in an index fund that tracks a stock market index.
The benefits of investing in a fund that tracks a stock market index are?
- Very-low fees: there’s no fund manager actively researching what stocks to buy and sell, therefore the management fees are reduced. As an example, Vanguard Total Stock Market ETF tracks the whole US stock market and has a low fee of 0.03% where as a managed ETF such as ARK Innovation ETF has a higher fee of 0.75%.
- Low portfolio turnover rate: Index funds have a low portfolio turnover rate, which means there’s less commission to pay. Active fund managers are more like traders than investors and constantly buy and sell shares to try and outperform the market. The constant buying and selling increases the commissions and tax the fund has to pay and this can reduce the performance. Looking at the fund prospectus of ARK Innovation ETF we can see it has a turnover of 55%, vs Vanguard Total Stock Market ETF of 3.4%.
- More diversification: since most indexes track a broad-based market index, this means your risk is spread across more companies. Should a company fail in the index, this is less likely to impact your long term wealth building.
- Simplicity: Investing in funds that track stock market indexes is much simpler than constantly researching what stocks to buy and sell. The simpler the strategy, the less likely you are to make mistakes that lose you money.
Warren Buffet’s Advice!
Warren Buffet, renowned investor and CEO of Berkshire Hathaway, has recommended index investing for most people. In his 2013 letter to Berkshire shareholders, Buffet advised putting 10% of cash in short-term government bonds and 90% in a low-cost S&P 500 index fund, specifically recommending Vanguardโs. His advice affirms the strategy of low-cost, long-term, broad-market index investing.
Conclusion
Most normal people like you and me, don’t have time to read financial statements to find out what companies are the best to invest in. We also don’t want to choose an expensive portfolio manager because they often do not outperform the market and sometimes fail altogether.
The solution, is to use an index investing strategy to build wealth from the stock market.