As mentioned yesterday, I’ve not been writing lots, poetry or prose, due mostly in part to power learning investing in the stock market. It’s long, long overdue I should have done this and lost a lot of opportunities in not having done it earlier, if I had generally taken the “safe” route. Mind you, what I learned recently wasn’t easily, and possibly as nicely, available just several years ago, so I might have been disastrous at it for all I know. Hence, I won’t berate myself too much on the cost of my procrastination as lately as the winter of 2020 when I was going to do this, and ended up learning all the world art history available on Khan Academy. But now that I feel I have a good grasp of things, I’m going to write about it. Why? CERTAINLY NOT to give advice! That’s for sure! No. Why I’m going to be writing about it is from a Chinese philosophy near and dear to my heart, which says you don’t truly know something until you can teach it. Now, I’m not going to “teach” all of investing in this and future posts about investing. No. Far from it! There are great full courses online like Wall Street Survivor where you can get all the info. I’m just going to “teach” my approach, which pulls out the most essential information from all that craziness, and why it’s “good”. Hopefully, with time, I’ll also be able to prove it with data on my outcomes, because getting rich slowly isn’t hard. It’s only trying to get rich quickly that is. So let’s get started!
Why get involved with stock market investment?
If you’re not sure why you’d want to get involved with the markets, the first and foremost reason to do so is that given enough time, which is only a handful of years or more, not decades, the market will outgain anything the banks will give you, as well as inflation. That, plus you don’t have to pay all the bank fees, commissions, and management rates at the levels the banks charge with today’s options, which also wasn’t available all that long ago in Canada where I live.
What about the risks of stocks?
You can buy what’s called index funds, sometimes also called an exchange-traded fund (ETF), which are like your replica piece of the stock market. The difference is the index fund is often done through a managed mutual fund that has more fees than the “do it yourself” fund traded on the stock exchange. For concepts of risks, though, consider them one in the same. I’ll get to the fees issue in another post. So if the stock market goes up 10%, your investment in index fund or ETF will also generally go up 10% (minus those fees), and same when the stock goes down 10%, where fees will make you lose a bit more.
The key to doing index funds well is to pick the ones that mirror the best stock markets, since there are many stock markets and many index funds, and pick the ones with the lowest fees. Fortunately, there’s been “one” index fund (a few variations of it in actuality) that’s outperformed others, and that’s the Vanguard ETF you can get via stock shares (or mutual funds if you prefer) that mirrors the S&P 500 stock market of the 500 large companies in the US. The variations are different names (and stock market “ticker names”) for the ETF version of these index funds, under which it is sold in different countries, like VSP in Canada and VOO in the US. The fact it mirrors the S&P 500 gives you an idea of what it’s done in the past. As much as that doesn’t predict the future, which is what you always have to keep in mind about looking at performances of anything related to stocks, it’s a far surer thing than histories of other stocks, funds, and such that are subject to the whims, good and bad, of other markets, sectors, and so on.
One other thing you should know about the Vanguard funds is its remarkable history. Paraphrased from what I heard on a Freakonomics podcast, they were created by John Bogle, who realized he didn’t need the ridiculously vast amount of money he could make with a successful index fund, so he kept the fees at like 0.04% when compared to 0.5% or even 1% of other funds or financial advisors! In the greedy world of money, it’s refreshing to see and be a part of such a spirit!
Wouldn’t a financial advisor do better than index funds?
Investing just on index funds sounds way too easy, right? Surely someone educated in the field would be able to do better with your money, right? Well, surely some, but not likely most, is the answer. Index funds outperform 92% of financial advisors! Round it to 90% if you like, but they all think they can beat the market, the way something like 80% of people in any field think they’re better than average. However, the ugly truth is plain old boring index funds beat 92% of these advisors, and more the longer you compare them. I’ve heard it on Freakonomics, and read it in other places, with even Nobel prize winners in economics doing invest and forget sort of investing via index funds.
But aside from index funds beating the crap out of the financial advisor cohort, the best part about investing with index funds is that you pay far fewer fees, usually as some commission portion of your gains or portfolio size with no cap, often even a minimum fee whether you gain or lose, because your financial advisors get paid first, as some commercial I once saw correctly touted! Listen to the first 25 minutes of the recent People I Mostly Admire podcast episode below from the Freakonomics to hear about why do index fund investing, and how easy investing on your own can actually be! I bet if you knew this before investing with a financial advisor, at least for investing and not complexity of some other finance, you’d never do it!
So this has been an intro of “why” and “what” to invest in to get your feet wet into investing, or maybe that’ll be all you might ever do or care to do. It can get you plenty of money with its compound interest over the years. I’m going to test the waters by going on my own to pick stocks with a portion of my investments for a little while to see how I do before deciding if it’ll be worth the effort, so I may end up doing only index funds for the rest of my life soon enough. However, for my next post, I’ll write about “where” to invest, as in with banks, stockbrokers like Robinhood, Wealthsimple, and the like, and the benefits and risks of each.