At the start of the pandemic, every person ever on Twitter was DMing me about the “hot stocks.” They were like…
“Nicole, should I buy Zoom?”
“Thoughts on buying Peloton?”
“Netflix NFLX is killing it, should I buy stock??”
To all of the folks who told me it was there very first time investing, I said “heck-to-the-no” to their stock questions and repeated the title of this article: Index Funds and Chill.
Warren Buffett said the greatest investment decision investors can make is to put money into low-cost S&P 500 index funds. And when the greatest investor of all time speaks, we listen. So, let’s unpack that.
What is an Index Fund, Anyway?
An index is a collection of different stocks by a certain set of parameters. So when you hear stock market reporters saying, “the Dow is at blah-blah,” “the S&P 500 is at XYZ” and “the NASDAQ NDAQ is at ladida level,” they’re talking about the three main indexes. The Dow Jones Industrial Average (or just “Dow”), for example, tracks the 30 biggest stocks in the U.S. including Apple AAPL , Microsoft MSFT and Disney DIS . The S&P 500 is made up of 505 different large-cap companies, or companies with a value of more than $10 billion. All of the Dow companies are in the S&P 500 plus 475 more, making up 80% of the U.S. stock market by capitalization, or value.
The NASDAQ is an index that tracks mostly technology and internet-related companies. There are 3,300 companies in the NASDAQ including Facebook, Alphabet (parent company of Google), and Amazon.
While these three indexes track large U.S. companies, there are other indexes that track smaller companies, including the Russell 2000, Wilshire 5000, and the S&P small cap 600. When you buy an index fund, you are basically buying a little bit of all of these companies, without buying the actual company.
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Why Index Funds Rule
Buffett and I both like index funds because they are 80% less expensive than actively managed mutual funds.You also get diversification built in, since they include small slices of lots of different companies from different industries; they are less risky because if one company fails within the index, you have all the others to prop it up.
Not that you should follow my investment strategy, because my goals are different than yours, but I personally like to buy index funds through a discount brokerage, because it saves me the time I would take researching individual stock performance. With index funds, I can automatically invest, month after month, ignoring the market’s ups and downs with confidence that overtime my investment will grow in step with the overall market, which has only gone up if you look at the levels over long periods of time.
Generally speaking, few investors — even the most renowned fund managers — beat the market. And the ones who do put an awful lot more time into their investments than I do or would even like to (if I did, I wouldn’t be able to write these articles!). So after my own cost-benefit analysis (cost being the time I spend managing my investments compared to the benefit of money I get from them), index funds are my go-to investments.