Our first investment class are index funds!
Index funds are a brilliant way to build the foundation of your investment portfolio. An index fund is a large collection of stocks (sometimes all the stocks) in the market.
Index funds have become a very popular way of investing. We have become big fans of index funds after we have read tons of books and studied investments for a long time!
An S&P 500 index fund for example holds all of the 500 stocks in the S&P 500.
The major advantages of investing in index funds are as follows:
- They offer a very broadly diversified investment in a large part of the market;
- You can invest monthly in them and let your investments compound gradually;
- They give you the returns (profits) of the entire market;
- They are extremely hard to beat consistently over many years;
- Stocks in the index fund are not bought and sold often;
- They can cost as little as 0,04% in fees;
- They cost very little time to track;
Most index funds are “market capitalization weighted”, which means that the larger the market capitalization (price x shares) of a company is, the larger their share in the index fund. The smaller the market cap, the smaller their share in the index fund.
The reason that their costs are so extremely low is because that they do not require active management from a fund manager. They pretty much operate on their own!
There are huge index funds available like the “Russell 3000” that hold all of the top 3000 stocks in the United States in one single package. There are really thousands of different index funds available with different investment companies.
We highly recommend you to buy index funds with a maximum fee of 0,10%!
The first popular index fund was introduced by John C. Bogle from Vanguard on December 31, 1975, which was called the “First Index Investment Trust”. At this time index funds were new and there was a lot of opposition and criticism.
This is no longer the case as they have now become widely adopted!
Once again, we conclude that index funds should be the foundation of every investment portfolio. This way you start with a broadly diversified collection of hundreds of different stocks (in different countries). After you can move on and diversify your portfolio even more by investing in more different investment classes!
We highly recommend to read the following books on index funds:
- The Little Book of Common Sense Investing by John C. Bogle;
- Money: Master The Game by Tony Robbins;
- Stocks For The Long Run by Jeremy Siegel;
- A Random Walk Down Wall Street by Burton Malkiel;