So what is your savings plan?
As Albert Einstein once famously explained...
There is great power in compound interest and saving money. Every time I look at a credit card statement I am reminded of how true this statement is.
So why don't we use compound interest and investing to HELP us?
So I am going to go through some of the best savings and investing options based on my own research and really focus on INDEX FUNDS. Note this is my own financial research, I am not by any means a financial expert, I am just a curious man who enjoys reading and learning
LONG TERM INDEX FUNDS HISTORICALLY
During the age of COVID-19, many things have radically changed but the data shows that having a diversified portfolio and investing passively in the market for the long term is still the strongest way to invest according to the data.
Just see this recent headline by CNBC...
See that article here: https://www.cnbc.com/2020/03/28/the-traditional-6040-retirement-portfolio-of-stocks-and-bonds-loses-20percent-for-only-the-fourth-time.html
PASSIVE INDEX FUND INVESTING STRENGTHS
John C. Bogle of VANGUARD famously developed his approach of carefully buying low-cost Index funds and sitting on them for the long term. Bogle argued that it is not intelligent to play risky games in the market for short term gains. Bogle stated it was better to instead invest in a diversified (Index) portfolio at low cost.
The other added benefit, Bogle argued, is that is would limit commission fees to a broker (though free commissions are now a thing). Bogle was concerned with the concept of "beating the market" and the fact that the individual investor could never be careful enough to ride the waves and "beat the market" and instead would just lose their winnings over time and simply stagnate.
So John C. Bogle would argue simply:
1) Buy low expense index funds
2) YOU may not be able to beat the market alone so do not spend a lot of time/money trying to by yourself
Advantages of an index fund explained above
STRENGTH IN THE 60/40 PLAN (60% BONDS AND 40% STOCKS)
Let's take a look at some interesting numbers, real numbers from 1926-2016.
For investors who invested in an index portfolio of 60% Bonds and 40% Stocks, they saw an average annual return on their investment of 7.8%. Out of the 91 years in the study, 16 of them were a loss. Most of them were winners, if not extremely conservative ones. But are we rolling the dice or are we saving for retirement, family, a house, loved ones?
INTERESTING PROJECTIONS USING "SMART BETA" AND MODERN ROBO MONITORED INDEX PORTFOLIOS 60/40 RULE
So fast forward to the investing innovations of 2020.
Now at online brokers (like E-Trade), for as low as $500 you can begin investing long term in a diversified index portfolio that is managed by computers and add to it at your leisure.
RISKS INVOLVED IN "SMART BETA"
They rebalance your portfolio annually, meaning they "shift" the balance and type of items within the portfolio based on their trading "approach" and on your risk tolerance. A big downside is that you have no say in this process at all, it is managed for you. Many have pointed out that smaller investors will actually incur greater risk due to the fact that their money is too small to truly diversify over a range of stocks and bonds when it is constantly rebalanced.
In reality, these systems will have to increase your small portfolio's overall risk in order to be profitable when rebalancing. This is still an interesting investing option and much cheaper than an actively managed mutual fund. For all the above reasons, I think it is most valuable to shave off profit/risk potential using the 60/40 concept which is more proven than any of these new ideas in investing.
A DOABLE EXAMPLE PROJECTION FROM E-TRADE
I have no connection to E-Trade, I just like their offering. Here is a very small passive investing example with one of their small investment accounts. They do charge a fee of 0.3% annually straight from the account.
EXAMPLE A:
-$500 initial investment
-Automatic deposits of $60 a month only (though not required)
INDEX FUNDS BEAT OUT MUTUAL FUNDS
Another great article about how index funds beat out mutual funds is here:
