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So today we’re going to be talking about index funds and i have to say i’m a little disappointed in myself because i haven’t made this video yet i did do a video a couple of months ago talking about some vanguard index funds and i covered some of this stuff but i have yet to do a video that covers everything you really need to know about index funds so that is
What today’s video is going to be so first of all who do i recommend index funds to i think index funds should be part of anyone’s portfolio unless you’re someone who is super ambitious and you want to do all of your investing yourself and pick individual stocks so me personally i have most of my money invested in individual stocks and i have a small amount
Invested in index funds so i think that’s a good idea for some people who want to have some active management of their account you know they want to study stocks and they want to be a more active investor but for someone who’s looking to be a passive investor someone who doesn’t want to worry about looking at stocks and reading earnings reports and things like
That then index funds are the best option out there so first of all what is an index fund well an index fund is a mutual fund or etf which is an exchange-traded fund that is tracking a specific underlying market very simple now an exchange-traded fund is just a basically it’s like a mutual fund that you’re able to buy shares of on a secondary market through the
Stock exchange so that is one of the things i like about index funds is that you can buy them as you do a stock so you don’t have to necessarily go out there and open a separate account to open up a indexed mutual fund if you don’t want to rather than picking stocks and trying to beat the market many people invest in the broad market indexes themselves because
The truth is most investors out there fail to beat the return of the market it’s a very difficult thing to do so if you’re someone who doesn’t want to try to do that if you’re someone who doesn’t want to actively pick stocks then you should be looking at index funds unfortunately most people out there get roped into actively managed mutual funds and i’m hoping
To shed some light on that and maybe give you guys at least the realization that you might be paying for something that is not doing you any good so most actively managed mutual funds fail to be the market return how many do you say well here’s the answer right here so in a 10-year period ending in 2015 82% 82% of large-cap funds failed to be the s&p 500
Now remember with an actively managed mutual fund you’re paying a much higher expense ratio than you would pay for a index fund so you’re paying money to pay these active fund managers to make investing decisions on your behalf while 82 percent of them failed to beat the market return so the big question for you guys is the big thing i want you to think of is
What are you paying for exactly what are you paying these active fund managers for so if you’re someone who has a mutual fund and that kind of scared you and made you realize oh wow i may be in that 82% i want you to go look into your mutual fund figure out what your expense ratio is and see if those fund managers are adding any value by actively managing your
Money and if they’re failing to beat the s&p 500 market return and you’re paying them a higher expense ratio than you would be paying for a index fund you should seriously reconsider whether or not you should have that mutual fund now if they are in the 18% that are beating the s&p 500 then obviously they are adding some form of value by actively managing
And researching stocks and allocating the fund in that way so what are the perks of an index fund well hopefully you’re already seeing the reason why people invest in these but here are the four main perks and reasons why you yourself probably should look at index funds number one is the broad market exposure as we say you want to be as diversify as possible and
The more diverse fied you are the better so having broad exposure to markets is the best thing you can do as far as diversity and lowering your risk so number one is the broad market exposure number two is that low expense ratio so you’re not paying for active fund management you’re not paying money managers there so as a result the expense ratio is much lower so
You want to look at your expense ratio of the mutual fund you have and compare it to a comparable index fund and see how much you could be saving i know a couple percentage points doesn’t sound like a lot but take that percentage and put it into a compound interest calculator and that will likely change your mind as far as how much money you are throwing away by
Having a mutual fund that’s actively managed especially if they’re not beating the market return number three reason that index funds are great is because of a low turnover and as a result there’s lower commission costs so if you’re in a mutual fund that’s constantly changing allocations and selling and buying stocks you’re spending a lot of money on transaction
And commission costs and the other thing as well is the fact that you’re going to have more tax drag that way because you may be paying short-term capital gains tax on those if they’re not being held for more than one year and you also have to consider the fact that anytime you’re selling you’re getting a capital gain from that so you’re paying taxes as you go so
You do have a higher tax drag a lot of the time with actively managed mutual funds number four is the fact that this is a passive income model because when you put your money into an index fund you may continue to allocate money into that fund as you go but other than that everything happens behind the scenes you know your dividends are reinvested and as the index
Changes so maybe the s&p 500 changes the companies listed on the s&p 500 index the actual index fund will change that around behind the scenes that’s really the only time you’re going to see any kind of turnover with an index fund is when the underlying index itself changes so index funds replicate the performance of an underlying index therefore there’s
No research or analysis research and analysis is what you’re paying these active mutual fund managers for because they’re believing and they’re hoping that with their research and analysis they’re able to beat the average market return and as we said before 82% are failing to do so here are some popular indexes that people may be looking at as far as looking
For an index fund the biggest one i think is the s&p 500 this is the 500 meeting companies on the us stock market then we have the russell 2000 this is another one people like to invest in looking to get small cap or grilled stock exposure this is a bunch of small cap companies then there’s the will shire 5,000 which gives you exposure to the total us stock
Market so as far as diversity goes that the best thing you can do as far as us stocks but you also want to be diversified internationally so make sure you’re looking at international stock market funds as well then there’s the djia the dow jones industrial average also known at the dowell 30 this is 30 large cap companies that many consider to be a list of blue
Chip companies so if you’re looking to invest in blue chip stocks and you don’t want to pick individual stocks investing in a fund tracking the dow jones industrial average is probably a pretty good idea for you then there is the nicky or the nakai i’m going to be honest i have no idea how to pronounce this one but this is the tokyo stock exchange index if you’re
Looking to have some global investments outside of the us the nasdaq tracks the securities on the nasdaq exchange the ftse 100 is the top 100 london stock exchange companies and then the vix is the implied volatility of the s&p 500 now there are many more than this these are just popular indexes that people follow but as far as index funds go there’s a wide
Number of companies you can go through as far as purchasing index funds i’m going to recommend you guys go through vanguard and i just want to state that i am in no way getting any kind of kickback by recommending vanguard i just have talked to a lot of people have done research myself and i think that most people would agree that vanguard has the best funds out
There and i’m going to give you guys a couple reasons first of all vanguard offers over 60 unique index funds and their expense ratio so the amount that you’re paying for that fund management is 71% lower than the industry average you want to obviously have that expense ratio be as low as possible so you’re keeping as much of your money as you can they also offer
Bond funds they offer targeted retirement funds so those are called their vision funds so at that point you could say oh i’m planning on retiring in the year 2060 and every five years i believe they reallocate the stock and bond the stock and bond percentage of that fund so your are more heavily in bonds as you get closer to retirement so there’s those funds they
Also have stock funds international funds as well as our real estate investment trusts or reits funds so there’s a ton of different funds you can invest in through vanguard and you guys definitely want to look at some bond funds as well as you know diversified stock funds so for me i’m going to recommend you guys to go through vanguard but i do encourage you to
You know shop around and do your own research but the fact that they are 71% lower than the industry average that’s a good selling point right there in my opinion okay so the last thing i want to cover let’s say you want to invest index funds you’ve decided you’re going to look at your mutual fund and see whether or not they’re beating the market return and then
You decide you want to go ahead and buy index funds well how do you do this the number one way and i would say the easiest way is to buy the index mutual fund through the vanguard website the only thing is they typically have a minimum account balance so i believe from the ones i looked at a lot of them had a three thousand dollar minimum balance so if you were
Looking to invest less than three thousand dollars in the fund you would be unable to do that through the vanguard website but there is another way to do this that is through an etf an exchange-traded fund through a secondary market so at that point you would look up the stock symbol and this is basically an etf is a mutual fund or an index fund traded like a
Stock so you buy individual shares of that index fund so that’s another way you can do that and the share price of those ranges but you can invest as little as the minimum price for one share and then the third way you can do it which is even better for those of you looking to invest a larger amount of money is through admiral shares and this is something new
That vanguard is offering this is basically where they have larger accounts with a larger minimum account balance i believe most of them were $10,000 or more but these accounts these admiral shares accounts have an even lower expense ratio than what they offer through their traditional mutual fund index funds so i would say if you’re someone looking to invest
Over $10,000 in a fund go through the admiral shares if you’re someone who is looking to have all of your investments in one place i would invest in them through the secondary market through your stock broker however remember that every time you do reinvest if you’re paying commission through your stock broker you’re going to pay commission but when you invest
Through the website through the vanguard website the mutual fund you’re not going to be paying commission every time you add more to your mutual funds so do keep that in mind but anyways guys that’s pretty much all i got for this video this is index funds in a nutshell i hope you guys enjoyed this video if you have any questions leave them in the description or
The comment section below i’ll be sure to answer them if you guys enjoyed this video please drop a like and if you are new to my channel please consider subscribing to be notified of any future uploads and as always i thank you for taking the time to watch this video you
Transcribed from video
INDEX FUNDS FOR BEGINNERS 📈 Buy Index Funds/Exchange Traded Funds (ETF) By Ryan Scribner
