What are Index Funds and the Top 3 Index Funds I Invest in to Retire at 35

Index funds... what are they and which ONES should you invest in

My simply guide to Index funds

By MeTheMillennial

Last weekend I was away on a trip with friends to Niagara on the Lake, if you haven’t been before check it out. It involved cycling through lots of wineries in Ontario’s Green Belt wine region. We were at winery number 3, an idyllic place called Inniskillen and wine glass #TBD when the topic of personal finance and investing came up. 

I gave my two cents on how I like to invest, when my friend turned to me and asked ‘So what exactly are index funds anyway, and what ones should I look to invest in’.

So a week later, I thought it would make a good post, given so many people (including me) tout index funds as the best strategy to follow. A good place to start would be to at least explain what they are and which ones I invest in. So here goes…

Background:

Index funds really emerged in the 1980s and ’90s as a popular investment option for beginners and experienced investors alike, since being developed by the Godfather of index funds himself, Vanguards Jack Bogle in the 70’s. 

They began soaking up money thanks to their ultra-low fees versus traditional financial advisors or hedge funds and also because of their amazingly robust long-term performance. 

They began to attract more and more money. 

At first, Wall Street was hesitant and wary but as of 2016, investors globally were pulling more than $300 billion annually from higher cost actively managed funds and directing more than $500 billion a year into index funds instead.

In fact as of 2020 Index funds have broken through $10 trillion-in-assets mark. 

10 trillion!! That’s 10, with twelve zero’s after it. And this trend is only going to continue.

So why are they so popular? Well let’s start with some quick facts.

  • They pool money from multiple investors (i.e. you, me, granny, banks, anyone who wants to invest) to buy the individual stocks, bonds or securities that make up a particular market index. For example if you want to buy a tiny piece of every stock in the S&P 500 (United States top 500 stocks) you would invest in an index fund that tracks the S&P 500 such as Fidelity’s 500 Index fund (FXAIX)
  • They are a great way to instantly diversify and reduce your risk because they track a market index, which generally rises in value over time. Meaning because you own so many stocks your risk is generally much lower than investing in single stocks
  • They’re considered a passive investment (i.e. you invest the first time and don’t need to do anything after that other than sit and watch your investment grow) with far lower fees and most of the time much better returns versus actively managed mutual funds which are managed daily by professional brokers, hence why they cost so much more 
  • Their potential gains and losses are less volatile, you can expect an historical average of about 10% per year over the long term versus those of actively managed funds that try to beat the market, and rarely do!

So, what’s in it for you (top 5 reasons), if you invest with your hard earned money?

From my experience, individual stocks may go up and down depending on every quarterly earnings release and bad/good news that is published, but indexes tend to rise over time. 

When investing in index funds, don’t expect 20% to 100+% returns that have been seen in meme stocks like GameStop or AMC.

But conversely you won’t lose your hat in a single investment that crashes as the market turns down, which it inevitably will. For reference the S&P 500 has posted an average annual return of nearly 10% since 1928. The past is not always a predictor of future performance. But I am not going to argue with that track record. Especially as investing becomes accessible by more of the world’s population and the FED continues to print money for fun.

Index funds have much lower fees that will reduce your returns over the long terms. The cost of expenses that actively managed funds charge you through commissions and management fees of your account (they call these expense ratios) are so much lower for passive index funds. The reason for this: You don’t have a team of people managing your investments and making alterations daily/weekly. You’re not paying anyone to actively follow the market and analyze quarterly earnings reports to make decisions on which stocks to buy or sell.

Index funds reduce your risk and help you sleep easier at night. Index funds instantly spread your investment risk across all of the stocks/bonds/securities in the given pool (example 500 stocks in the S&P 500 mentioned earlier) and also offers you the investor greater choice about conservative and riskier investments, as well as a broader mix of industries and asset classes. There is essentially an index fund that tracks every industry and asset class. I stick with the basics, see below the top three I am investing in.

Index funds are just more simple to understand. Hopefully this article is helping to explain what they are, and why I like them. Investing can be so convoluted and complex to understand with industry jargon thrown about, but index funds have a much simpler strategy – essentially what you see is what you get. Their goal is to only track the financial progress of the index to which they are linked to. Nobody’s behind the scenes, dumping bad investments and buying good ones. There is no one making a bet on shorting GameStop or going long on AMC. 

So, what are my top 3 picks where I actually put my hard earned money?

Now before you say it, I am not a Vanguard fanboy lol or affiliated or sponsored by them in any way. The top two most competitive low cost index fund investment firms in my opinion are Vanguard and Fidelity. Vanguard are the original founders of these types of investment vehicles and have really low fees, which I like.

This is also not an exhaustive list, I would encourage you to research which index funds would be a good match for your time horizon and risk appetite. But these will definitely be a good starting point, and is where I am contributing most of my money every month. If you are new to investing, all you have to do in your brokerage account is search for the ticker symbols below and then select the number of shares you would like to buy. It is as simple as that to get started.

*As always, I am not an expert or financial advisor, so nothing on this website should be considered financial advice. These are just my opinions, everyone is different. Always do your own research and have your own independent thought process

VTI Growth of 10,000 dollars
1) Vanguard Total Stock Market ETF (Ticker Symbol: VTI)

VTI tracks the total US stock market index including the S&P 500, in fact you spread your investment over approx. ~4,000 stocks. See historical performance graph above. As you can see over the last 10 years there has been consistent growth. $10,000 dollars would now be worth $40,000, a 400% increase with very low risk.

Summary Stats:

  • Seeks to track the performance of the CRSP US Total Market Index.
  • Large-, mid-, and small-cap equity diversified across growth and value styles.
  • Employs a passively managed, index-sampling strategy.
  • The fund remains fully invested.
  • Low expenses minimize net tracking error. Expense ratio 0.03%.
VOOV Growth of 10,000 dollars
2) Vanguard S&P 500 Value ETF (Ticker Symbol: VOOV)

VOOV tracks the value stocks in the US. Generally higher dividends, and invests in companies such as Banks (JP Morgan), CMT companies (Verizon) etc. Spreads risk over more than 400 value stocks, and again has experienced a 300% return over the last 10 years. In my opinion this index isn’t as overprices versus the top tech firms in the S&P 500, such as Amazon, Tesla, Google etc. So I believe there is more juice to grow here based on strong fundamentals.

Summary Stats:

  • Seeks to track the performance of the CRSP US Total Market Index.
  • Large-, mid-, and small-cap equity diversified across growth and value styles.
  • Employs a passively managed, index-sampling strategy.
  • The fund remains fully invested.
  • Low expenses minimize net tracking error. Expense ratio of 0.1%.
VEE price growth
3) FTSE Emerging Markets All Cap Index ETF (TickerSymbol: VEE)

I also am building up my investment in emerging markets. I see huge potential here and a lot of the growth over the next 10-20 years to come from emerging markets. VEE is a great way to gain exposure to this. It invests directly or indirectly primarily in large-, mid- and small-capitalization stocks of companies located in emerging markets. Expense ratio is slightly higher here, but still extremely low versus actively managed funds.

Summary Stats:

  • Seeks to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index to the extent possible and before fees and expenses.
  • Invests primarily in the U.S.-domiciled Vanguard FTSE Emerging Markets ETF.
  • Employs a passively managed, index-sampling strategy to gain exposure to stocks included in the index.
  • Low expenses minimize net tracking error

Learn More – Get educated!

Great, there you have it – the top 3 index funds I am investing in and will continue to do so on my path to retire early at 35 years of age.

To continue learning about index funds and investing in general, make sure to check out my post on the best books for FIRE and Index Fund Investing that you should be reading.

Let me know in the comments what index funds you like and why.

As always, I hope you find some of these areas helpful in your own journey to whatever your goal is. Make sure to follow along on my journey on how this thing called life and my goal of financial freedom works out, I keep my net worth updated here. Sign up to my newsletter, you will receive some great free content such as a first steps to financial freedom guide and an overview of the easiest sites/places to invest, While also staying up to date on my latest blog posts to show you the path forward. I post at least weekly and no spam, I promise.

Leave a comment or contact me if you would like to get in touch and update me on your progress towards your goals.

Catch you soon,

MeTheMillennial

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