With a stock market that is moving so quickly in either direction up or down, it is becoming harder and harder for short term investors to be successful without losing money. Short term day trading is a good way to make money fast, if you are good at timing markets and have some good fundamental analysis. Keep in mind though, that as fast as you can make money day trading, you can also lose it all just as fast.
When comparing a short term plan, to a long term index fund investing plan however it is almost certain, that the short term plan WILL LOSE and I will explain why in this article.
Before you start investing for the long term though I want EMPHASIZE a very important step that must be taken first before ever investing any money. First it is very important to get out of debt and then when you are debt free, anything you have as far as cash flow after you have taken care of basic necessities and expenses, goes to investing.
So to re-cap here pay off your debts, pay your bills and invest the difference. NOTE: For starters, I would highly encourage and suggest to anyone, to save up enough cash to cover all living expense and bills for at least 6 to 12 months before investing the difference.
So now that we have the basic steps that need to be taken FIRST before investing for the long term, lets continue on…
Challenges we face with Playing Stock!
Based off my own experience and with endless hours of research dedicated to the short term approach and long term approach, I have discovered that there is just no way to TIME the markets with 100% accuracy all the time. Even with professional day traders who work for the big mutual fund companies, they find themselves losing money or NOT being able to outperform the S & P 500 96% of the time. This information is public through various resources and books published from some of the greatest investors of all time.
If you have any doubts about what is being said here… just read a couple of books such as “The Intelligent Investor” by Benjamin Graham or “Money Master the Game” by Tony Robbins.
In both those books, they cover in great detail just how much RISK is involved with being an ACTIVE investor. The reason for the RISK is due to trying to keep up with “change through time” of individual companies, HIGH FEES for purchasing stocks or mutual funds, and making educated investment decisions based on information provided by companies as you also try to time the markets if you are investing for growth. An almost IMPOSSIBLE task for one person to do if you don’t have the resources or a team of people watching the investments at all times. Even then…. ONLY 4% of Hedge Funds will outperform or match the market returns of 9% as a whole annually.
So with Timing the markets not working and the odds being against you as an active investor, how do you come up with a plan that allows the individual investor to get any bit of a GOOD return without losing a whole lot of money in the process? Is it even possible? The answer is YES, it is possible but it requires something called Index Fund Investing with a combination of a fixed index annuity which we will cover at a later time, ASSET Allocation and re-balancing of a portfolio from time to time.
In the Segments moving forward, we will show just what Index Fund Investing is and why you would want to use this method of investing FIRST rather than investing in individual companies as a Long Term Plan.
What is an Index Fund?
Index Fund Definition/Investopedia – An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover
Why is this a good tool to use for building wealth versus a individual stock? First individual stocks may cost more to purchase through a broker which is just another way of saying – HIGHER FEES.
There is a phrase used that you may have heard before and is really the #1 reason why people lose money when it comes to the investment and financial world. The phrase is this… “What you don’t know, you don’t know“. In the investment world what you don’t know really will hurt you and set you back years in regards to annual returns and building wealth. One thing people don’t know a whole lot about is how much they pay in FEES for their mutual funds. Why is this important you might ask?
Below is a video that I have provided you with, that shows just what the difference is in 1% fees versus 3 % in fees and just how much that can save you in a life span of 30 – 40 years of savings being compounded annually. This video will also include a basic Overview of Index Fund Investing so you can better understand what is being covered on this page.
What types of Index Funds are there to chose from?
There are several types of Index funds to chose from, so I am not sure of the exact number of funds that are out there. Most common mutual funds can be bought through brokers or the mutual fund company that creates and manages them. I know that some of the more common companies you can purchase these funds through are companies such as Vangaurd, Fidelity and TDAmeritrade.
As for the an exact mutual fund to invest in? Again, we do not tell people where to invest their money here at HOWTOPLAYSTOCK.com but below we have made a list of some of the mutual fund ticker symbols that are available to purchase through various brokers.
- VOO – Vangaurd 500 Index ETF
- FTSE/VFWAX – Vangaurd All-World ex-US Index Fund Admiral
- VBLTX – Vangaurd Long Term Bond Index Fund
- MCSI – EMM – Ishares emerging markets Index / ETF
These are just a few that you can chose from, that carry exposure to different markets. Later on we will cover one of the exact formulas for the asset allocation on indexing that was provided by Ray Dalio (Founder and owner of the worlds largest hedge fund in the world).
Why balance is Key to Indexing
If you have ever done any research on asset allocation you will notice that different portfolio allocations are made up of and hold exposure to a certain percentage of funds in different markets. For example you might have 10% in commodities, 50% in stocks, 30% in Bonds ect…
This is very crucial for balancing a portfolio. The reason why you want a balanced portfolio is because not all funds are going to be performing at their best, at all times through out any given year. So it would make since that an individual investor would want to position themselves to capture returns pretty much all year right?
The only way that has been proven to work for the (Little Guy – You and I), is to diversify a certain amount of your investments to exposure in specific markets. So another wards if U.S. stocks are tanking then commodities might be going up in value or if commodities and U.S. stocks are tanking then possibly international stocks would be performing rather well since they aren’t in the U.S.
It gives you more exposure so that you aren’t losing as often or if you are losing, it is suppressed because your losses are being absorbed by the returns on other investments. There is of course much more to balancing a portfolio and asset allocation which we will cover later. Just remember that indexing across all markets is a much safer option and offers more long term reward to building wealth rather than trying to go for the (Home Run or hitting the jackpot) playing a single stock.
If you have further ideas or opinions that you would like to share on this topic of long term investing or index fund investing, please feel free to leave your comments in the comments section below. Thank you!