Start Investing Even When You Don’t Know How
By: James Cochrane Updated: January 15, 2020
Investing in hard. Anyone who tells you otherwise is either trying to sell you something or doesn't know how to invest themselves. If it were easy everyone would be multimillionaires.
The dynamics of investing are within reach. It's just that it takes a lot of time to go through financial reports, read commentary about your potential companies, etc. Reading though financial statements not only takes time, but you need to know what you are looking for.
You finish you analysis and determine a list of companies to invest in. You did your due diligence and still some companies fail. That is annoying but common. The good news is you get better the more experience you get.
No Time To Research
What if you decide you are too busy to invest? Should you throw in the towel and forget about investing? That won't be necessary. In fact, if you take this one bit of advice, you probably will never need to look at your investments ever again!
The advice is to make steady investments into an S&P index fund. You won't need to do any research because you know the companies. Index funds often have lower expenses. You won't get hit with a bunch of fees. The great news is the only shopping you need to do for an index fund is for the lowest fee. The underlying stocks the fund invests will all be the same.
Why This Works
Investing in an S&P index fund invests in all the components of the S&P 500. Take a look historically at how well this basket of stocks have done. If you invested in 100 shares of the S&P in February of 1968 (~$90), it would have cost you $9,000. Today, without considering any splits or rebalancing, etc., your 100 shares would be worth ~$257,000.
Oh, and this includes many years of turmoil. Let's start with the Vietnam War. Then, the Oil Embargo of the 1970s, the stock market crashes of 1987, 1998, and 2008/2009. Plus, you can choose many other not-so-wonderful events that occurred such as 9/11, etc. The point is, even after all of those events, the S&P continued to rise over time.
Do What Warren Suggests
The famed investor, Warren Buffett, was interviewed about what he will do with his money once he has moved on to greener pastures. He specified that he will invest a good chunk of his money into an index fund.
Buffett also made a bet with hedge funds and one hedge fund took him up on the bet. The bet was placed in 2007 and just settled in December 2017. Buffett bet that the S&P 500 (SPX) would handily beat any portfolio of any hedge fun. The hedge fund manager didn't even wait for the end of the bet to concede that it lost. It declared Buffett the victor well before it the bet ended.
Most People Will Not Listen to This Advice
Most people are not going to take the advice of Warren Buffett or the advice given in this article. This is because it's a boring way to invest. People who have the betting spirit want more action. Of course, they look back later in life and wish they had been more careful with their money.
As long as you are willing to invest for the long term, there isn't much that will beat an index fund. It checks off all the bullet points for safe investing, diversification, low costs, minimal transaction costs, etc.
An index fund must invest in the components of the index it comprises. For instance, if a company stops being part of the S&P, the index fund must sell all of its shares of that company and replace them with whichever company is added, etc.
Stocks Revert to the Mean
You have likely heard the term, "revert to the mean". It is also referred to as regressing to the mean. Without getting into too much statistical mumbo-jumbo, it refers to when something gets away from its normal values, i.e., the mean, eventually they will return to the mean. This happens in stocks as well as many other entities.
The takeaway is even though you may find some funds that outperform the S&P in the short-run, in the long-run returns regress to the mean. Guess what the mean is? Give yourself points if you guessed the S&P 500 stock returns.
Had you stuck with the S&P, you wouldn't have had to deal with any of the volatility with those high-flying funds. Their returns are unsustainable. Just take a look at Buffett's 10-year bet if you're not convinced.
If you have a fiery spirit and need more action, then at least set aside some money to invest in an index fund. Yes, it's boring. However, the returns you will receive over time is anything but boring. Then, you'll have an edge on all the people who went broke trying to time the market.