Getting Started

Mountains of books have been written on investing. But these books, along with heroic stories of stock market wins and cautionary tales of catastrophic losses, (to say nothing of the squawking heads on TV) can make the subject incredibly intimidating.

But here’s the worst kept secret of the last many decades: For the average person looking to build wealth, investing isn’t – or “shouldn’t” be  – complicated.

To do well in the stock market, New York Times financial writer Neil Irwin wrote in February 2021, “All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.” He reiterated the point in a Marketplace radio interview:

“This is not some new piece of, kind of financial advice or personal finance advice. This is what every personal finance advice person has been saying for decades. But the math is clear-cut. You know, if at any point over the last several decades, you’ve had money to invest and just put it in an S&P 500 index fund, reinvested dividends, kept fees low, tried to avoid taxes, you’ve done quite well and you have doubled or tripled your money, depending on the exact time horizon if you had the patience to just stick it out and not overreact to swings in the market.”

Given this, let’s focus on how you can execute this strategy using Index Funds, Exchange Traded Funds, and Target Date Funds. Once armed with this knowledge you should be able to confidently make a decision about what’s right for you.

Investment Products

• Index Funds: This is a grouping of individual assets like stocks or bonds. The most well-known index is the “S&P 500” which contains stocks from 500 of the largest public companies in the U.S. When you buy one share of an index fund, you are buying a small portion of all the companies in that index.

• • Benefits: Index funds (which are technically a type of mutual fund, or in some cases, a type of ETF, by the way) are good choices for long-term investing because they give you instant diversification which means less risk compared to owning an individual stock and fees are generally low because they are “passively managed.” This means nobody is being paid to actively pick and choose which companies are in the index. Better yet, over time, index funds have performed better than actively managed funds.
    
    You’ll want to look for an index fund with an expense ratio of 0.2% or less. While this might not sound like a lot, small differences can make a big difference over time. Don’t even consider funds with expense ratios higher than 0.5%.

• • Considerations: There are different indexes that have more or less risk. For example a bond index is likely to have less risk, but also lower growth, than a stock index. To get your ideal risk vs. growth ratio you may need to manually invest in multiple index funds. Then, depending on how those different funds perform over time, you’ll want to reallocate (i.e. buy and sell) shares in those funds to maintain the right balance.

• • Cost to Get Started: Some index funds – but not all – require an initial investment amount to get started, maybe between $1,000 or $3,000. After you’ve invested that much, additional purchases can usually be made for the cost of a single share of that fund or partial shares with as little as a single dollar of additional investment.

• Exchange Traded Funds (ETFs): For the purposes of the long-term investor, ETFs are very similar to an index fund. Most are passively managed, have low fees, and have produced reliably good returns over the long-term. The main difference is that with an ETF, there usually isn’t a minimum initial investment amount that’s any higher than the cost of a single share of that fund. So if you don’t have a few thousand dollars ready to commit to an index fund, an ETF can be a good way to go.

• Target Date Funds: These are generally a mix of different types of index funds. What makes them special is that as the fund gets closer to its “target date” the types of indexes it is invested in become more conservative – which is generally what you want as you’re focusing on preserving wealth closer to your target date rather than growing wealth (since focusing on growth tends to involve more risk).
  For example, since bonds are generally safer than stocks but also hold less long-term growth potential, a fund that is relatively closer to its “target date”, will have relatively more of its allocation dedicated to bond indexes compared with stock indexes. Conversely, a target date fund further in the future will aim for more growth and will therefore have relatively less allocation to bonds and more to stocks.

• • Benefits: These are your one stop shop to long-term investing. Since the fund’s allocation is automatically adjusted on your behalf over time, its risk vs. growth ratio – stays properly balanced relative to the target date. And you don’t need to do anything. Just buy your shares, and keep buying.

• • Considerations: Because target date funds are “funds of funds”, and it’s possible that each fund has its own set of fees, the expenses associated with target date funds can be higher than an index fund or ETF. This isn’t always the case  – and many target date funds still maintain very low fees – but it’s worth comparing a few target date funds side by side to see how fees compare. Additionally, since age is the only factor in rebalancing, it might not be appropriate for your risk tolerance. (One way to account for this is to select a fund with an earlier date – relative to your “actual target date” – if you have a lower risk tolerance and set a fund with a later date if you have a higher risk tolerance.)

• • Cost to Get Started: It will depend on the fund but many will have a minimum threshold around $1,000.
• Bond Fund: These are similar to index funds. But in the case of a bond fund, the fund is invested only in bonds (not stocks). While there are different types of bond funds, and some which carry more risk than others, the most common goal of a bond fund is to generate income for investors.
  • Benefits: Just like with other funds, you are buying into a grouping of many individual assets (in this case, bonds) and therefore getting a high degree of diversification – and therefore lower risk – within that asset class. Additionally, bond funds tend to have very low investment minimums.
  • Considerations: Typically, bond funds are seen as a less risky investment than stocks but this means that over the long-haul, the returns tend to be lower. Additionally, if you are buying into a bond fund (as opposed to an individual bond) for the purpose of income generation, it’s important to understand that the income generated will fluctuate since the bonds in the fund can change.

Additional Reading

We encourage you to read other online resources so you can be comfortable with your decision. Just try not to fall into the trap of “analysis paralysis.” Remember: the sooner you are invested, the longer your investment has time to grow. When it comes to having success with investing, time is your greatest friend.

If you’re looking for good all around personal finance books that provide particular focus on specific investment choices, here are two we highly recommend.

• JL Collins’ stock series on his blog, or better yet, his popular book The Simple Path to Wealth. This a great all-around personal finance book but particularly well-suited to those interested in the Index Fund do-it-yourself approach to investing. He also provides good detail on Target Date Funds.
• Ramit Sethi’s bestseller I Will Teach You to Be Rich highlights Target Date funds for their beautiful automation and simplicity among a variety of other ways to automate and simplify your financial life.