Why I love index investing
A while back I posted my thoughts on the Real Estate Vs. Investing in the market & renting debate. In the case I laid out investing won. In the future I will compare the two over longer periods as that’s how both are meant to be held.
In the meantime, I want to dive deeper into the philosophy and lifestyle benefits of index investing. I want to try explaining why it’s turned me on.
I once read somewhere that the difference between the wealthy and everyone, is that most people work for their money and wealthy people have their money work for them.
In essence, investing is putting your money to work: borrowing your money to businesses that use that capital to generate a profit and give you a cut for the use of your money.
This can be done by investing in your own business (entrepreneurship), investing directing in specific businesses (venture capitalism or individual stocks), or by buying index investments.
I am focusing on the latter of the 3. I think it generally holds the easiest path to entry and least risk. I will tell you why.
Once your portfolio reaches a certain point, your money begins to generate sizable returns. All the while keeping the principle – your original money – intact, and continuously generating more money for you.
You can use these profits to pay for vacations, cover your rent/mortgage, or replace your day job to supplement your income while you pursue passions that might under-pay but over-deliver in happiness.
Or better yet, reinvest those profits to fund an early and limitless retirement.
All you have to do is spend less than you make – or find ways to make even more money – and invest that capital into the market. On a consistent basis. All the while sticking to a plan and not trying to beat the market. That doesn’t work.
That’s how you do it, now here’s why it works.
Investing in the stock market delivers one of the best, and most reliable returns – over the long term. When you invest in the market, you are buying into people, and businesses that are aiming to ever-increase productivity and profits. Where you can go wrong is buying into separate business stocks. You can also go very right, and see huge returns.. But despite a thorough analysis, that generally also involves some luck.
Investing in your own business and lending money to a start up through venture capitalism both have very high reward potential. But the time, effort and risk involved in these options are much higher as well.
I would recommend anyone who has an idea with passion and work ethic to start their own enterprise. But you need to diversify and protect yourself. An index investing portfolio does just that.
The best route is to invest into an Index fund. An index fund is a group of companies or a chunk of the market in one purchase-able unit. You are able to reduce risk and costs by grouping these all together.
Now just like the newest Luke Bryan song, companies come and go all the time. Business is a fierce environment where only the strongest and most adaptable survive. Index funds re-balance as these companies come and go. This allows you to continue seeing growth and only grow over the long term. The index fund is self cleansing.
Below is a snapshot of the history of Dow Jones Industrial Average index over 100 years.. Its been a bumpy ride at times. But always up.
The force that allows your money to grow into a vast wealth is:
Compound Interest – The addition of interest to the principal sum of a loan or deposit is called compounding. Compound interest is interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest.
Year 1: $1000 @ 6% interest = $1,060
Year 2: $1060 @ 6% interest = $1,123
Year 25: $4,291 @ 6% interest = $4,548
That’s with no further contribution of money. And you didn’t do anything but deposit that grand into a well-chosen fund.
Overtime, most stock prices rises as businesses grow and inflation rises. The growth in the price of your stock in addition to Dividends, really kick compound interest into high gear.
Dividends – a sum of money paid regularly by a company to its shareholders out of its profits.
Investing is a system with the potential to amass great wealth. All you need to do is follow and remember these simple points.
- Educate yourself
- Generate money
- Spend less than you make
- Invest it on a consistent basis
- Invest diligently and keep away from flavor-of-the-week trends
- Reinvest profits
- Don’t get emotional.
It’s fairly simple in theory, but gets a lot more difficult in practice. The last bullet, don’t get emotional. This is where fortunes are built and lost. You must be investing for the long term. You must expect and understand that the market is a wild, up and down, insane ride and be willing to buy more when the market is down where everyone is selling, and hold when the market is high and everyone is buying.
Investing is like a giant, never ending puzzle for me. The more I research, the better returns I see. And since I’ve got the ball rolling, my effort can decrease while my wealth increases. The more I learn about money and this system the more my eyes are opened to the way the world works.
The thought of getting paid while I eat, sleep and even shit.. Is one of the best thoughts in the world.
A common rebuttal to investing in the market I frequently hear when I discuss this with people is:
“The stock market is risky, I don’t want to lose my money.”
Risky as opposed to what?
Leaving it in the bank doesn’t even beat inflation in most cases so you are actually losing money.
Only 1 in 5 businesses makes it passed the 1.5 year mark from start up.
Owning Real Estate comes with a myriad of responsibilities, costs and risks.
Yes, investing involves some risk. Markets go up and down all the time, some stocks and indexes more than others. But the thing is, you only actually lose money if you sell when stocks are down . As well, even if your principle is lower today, this week or even this year, it will still be paying dividends if you’ve bought the correct equities. Also, when you’re investing over the long term there’s lots of research showing most indexes only make money over minimum 10 year periods.
If I haven’t sold you yet on the benefits, I’ll reiterate: “Get paid to shit and sleep”
Conclusion: index investing is necessary folks,