Index funds are arguably the most powerful, passive, wealth-building tool that exists
In fact, Warren Buffett himself recommends that most people who are looking to invest
should simply buy a low-fee S&P 500 index fund. He even went so far as to wager a bet against the professional stock pickers
also known as the hedge funds. Buffett placed a now-famous $1 million bet against five hedge funds
wagering that a simple S&P 500 index fund would generate better returns than all of them over a
10-year period. In his 2017 letter to shareholders, he shared the results. And while some of the hedge
funds got off to a good start, the S&P 500 ended up beating all of them by a massive margin. During
that decade, the S&P 500 returned 125.8%. Meanwhile, the portfolio of hedge funds generated returns of
2.8% on the low end to 87.7% on the high end. So consider this, if the professional stock pickers
can't beat the market, then your odds as an individual retail investor are even worse
I'll be teaching you a no-stress passive approach to investing in this video following the exact
strategy that Buffett recommends and the one that he smoked the hedge funds with. In addition
I'll be showing you how anyone can become a millionaire following this strategy
so make sure you stick around to the very end. But for starters, what exactly is an index fund
Index funds are a pool of money that is used to invest in a basket of different assets
like stocks and bonds. The goal is to generate returns for investors
However, the investment approach here is different than traditional mutual fund investments and
hedge fund investments. Traditional mutual funds are actively managed by teams of investment professionals who pick and choose the individual investments
Hedge funds are similar, but they often take on more risk in order to potentially generate higher returns, and they are normally reserved for high net worth investors only
The main point here is that these types of investments involve a lot of human decision making, and that is paid for by the fees collected from the fund
Many decades ago, this active money management approach was the only option for those looking to invest in a fund
And this led to fund managers making huge sums of money because they collected their fees regardless of the underlying performance of their fund
Then, in the mid-1970s, a man named Jack Bogle had a revolutionary idea
He felt that the traditional mutual fund approach was flawed and that it enriched the fund managers more than anything
To lower costs for individual investors, he came up with the concept of mutual funds that
tracked the broad market instead of being actively managed. In 1976, Bogle introduced the Vanguard 500 Fund
This fund tracked the performance of the S&P 500 Index, which are the 500 largest publicly
traded U.S. companies. Not only were the management fees substantially lower, these index funds did not charge commissions
on investment purchases. While it started off slow with only $11 million raised in the first year that it was launched
today this fund alone has over $1.1 trillion invested in it. Now, if you want to learn more about these Vanguard index funds specifically
I have a whole video about them which I will put in the corner for later. Index funds revolutionized the world of investing, and it all started with a simple idea
Today, this is how most people invest, instead of using a traditional mutual fund that is actively managed
But there are a few different types of index funds out there, so let's dive into the differences now
The traditional index fund investment is actually an index mutual fund. While that might sound confusing, all that means is the fund management team follows a passive approach with the fund
Instead of picking individual investments, the fund aims to replicate an underlying benchmark or index as closely as possible
This requires a lot less work and fewer fund managers, so as a result, the management fees are significantly lower than traditional mutual funds
These index mutual funds usually come with a minimum investment in order to get started
For example, the minimum investment for the Vanguard 500 fund is $3,000
That minimum investment is out of reach for many investors who are just getting started, and that's where the other type of index fund comes into the equation
Exchange-traded funds, or ETFs, have become the preferred method for investing in index funds today
These ETFs are fund investments that are split up into individual shares
and then those shares trade on the same exchanges as individual stocks do
The benefit here is this makes investing in an index fund as easy as investing in a stock
Instead of having to put together $3,000 or potentially more for an index mutual fund investment
With an ETF, the minimum investment is going to be the cost of one share
And today, fractional shares have become a commonplace. This allows investors to purchase a small piece of one individual share
further lowering the barriers to entry for getting started. For example, with Robinhood, which is the brokerage platform I'm going to be showing you shortly
you can invest in these fractional shares in $1 increments. So instead of needing $3,000 to invest in an index mutual fund or about $500 to buy a whole share of an ETF
you literally just need $1 to invest in a fractional share of an ETF
You can also buy and sell these ETFs during the same trading hours as individual stocks
whereas with index mutual funds, there is usually just one trading window per day
So we're going to continue on here looking at these ETFs as the preferred method for investing
in index funds today. And real quick guys, if you've gotten value out of this video so far
please be sure to drop a like as well as subscribe and hit the bell as it will really help me out
Now at the beginning of this video, we mentioned how Warren Buffett smoked the hedge funds with a
simple S&P 500 index fund. Let's now cover what the S&P 500 actually is in more detail
The Standard Poor 500 Index is a market value weighted index of the 500 largest publicly traded companies in the United States And market value weighted simply means the larger a company is the more weight that
it carries in the index. So when you invest in the S&P 500, a large portion of your money goes into stocks like
Microsoft, Apple, Nvidia, Amazon, and Meta because of just how large these companies
have become. Finviz has a heat map that will show you this visual in action
The larger a square is, the more weight it carries in the S&P 500 index
Now, the S&P 500 was officially launched in 1957, which obviously predates many of the companies that are included in the index today
To adjust for this, the 500 companies that are included in the index change over time
based on what companies are the most valuable today. The S&P 500 is the most widely accepted benchmark for tracking the performance of the US stock market
And because it has been around for so long, we have decades of historical performance to look back on
According to NerdWallet, the S&P 500 has returned about 10% on average annually over the last decade
assuming that you are reinvesting your dividends. So in addition to returns being potentially generated from the value of the stock or ETF going up over time
you also have this secondary income stream in the form of dividend payments
And dividends are a way that well-established companies will share a portion of their earnings
with the shareholders in order to keep them sticking around. Later on, I'm going to be showing you exactly how to enable dividend reinvestment
That way, you can make sure you're maximizing your return potential. Now, as far as why people invest in the S&P 500
the very reason for investing in the first place is to protect your buying power from inflation
and also to grow the value of your money. Inflation has historically been around 2% annually
but since the pandemic and the stimulus money that entered the economy
inflation has been significantly higher. And this makes investing all the more important
because idle cash sitting on the sidelines is now losing purchasing power
at a faster rate than it has in the last 40 years or so. Now, another major benefit to investing in the S&P 500
is it provides you with diversification across the entire U.S. economy. Let's revisit the FinViz heat map that I showed you earlier
When you invest in the S&P 500, your money is spread out across all of these different sectors and industries
This gives you exposure to all of the different segments of the US economy
And even if one particular company or segment takes a nosedive, the rest of what you own will help you to offset that
With this type of strategy, you also have the benefit of being able to follow a set-it-and-forget-it approach
where you can fully automate everything and then spend your time doing whatever you wish
Now, let's dive into the tutorial on how to invest in your first index fund through an ETF
Now, I'm going to be showing you how to put all of this into action using the commission-free stock trading app Robinhood
And if you want to get a free stock worth up to $200 when you create your new account
be sure to use my affiliate link down below or visit ryanoscribner.com slash Robinhood
I also have a full 45-minute tutorial on Robinhood for beginners, so if you want to learn more about this investing app, I will put a card in the corner for later
So here we are inside of my Robinhood account that I use for demo purposes, and we currently have buying power of $11
But what I'm going to do first is show you how to actually deposit money
That way, if you are starting out with a new Robinhood account, you'll know exactly what to do
So we're going to click here on buying power, and then we're going to click on the deposit funds button, and we're going to deposit an additional $9
That way we have $20 to invest. So we're going to click on the review button after typing in nine, and we're looking to do a one-time deposit
So we're going to leave the frequency just the way it is, and then we're going to click on the transfer $9 button
Now, just like that, our deposit was initiated, but one of my favorite things about Robinhood is that they offer instant deposits
So if we click on the continue button, you can see that our $9 is available instantaneously for investing
and that is before the funds actually transfer over from the bank account
So that's one of the benefits to using Robinhood is you can invest your money immediately
If we click on the continue button once again, we can now see that our buying power has increased to $20
We're now going to click on the search button in the top right. And if you don't know the particular symbol for the stock or ETF you're looking to invest in
you can simply type in the name. So if we type in Vanguard, for example, we can see the Vanguard S&P 500 ETF populates at the very top
And that is under the symbol VOO. We're going to go ahead and click on that now
And we can see that one share of VOO is currently 483 or 484
it's changing every couple of seconds based on the current quotation price. And if we scroll down
here, we can get more information about my position in VOO, which is from a previous tutorial video
And we can also see a breakdown of what is in the fund. And this is pretty cool because it shows you
what percentage of your money goes into these particular sectors. So when you invest in the
S&P 500, about a third of the money goes into technology, about 12% goes into financial services
about 12% goes into healthcare, about 10% into consumer cyclical, and so forth
And another thing you can do here is click on the top 10 holdings
and see what companies are carrying the most weight in the fund
Now, this is pretty crazy, but when you invest in the S&P 500
about 7% of your money goes right into Microsoft, about 6.5% goes into Nvidia, same with Apple
about 4% goes into Amazon, and then we have Meta, both share classes of Alphabet
the parrot company of Google making up a large percentage. And then we have Berkshire Hathaway, Eli Lilly, and Broadcom
So when you invest in the S&P 500, this is where 35.7% of your money is going
is just into these top 10 stocks. When you're ready to actually purchase shares of the ETF
we're gonna click on the green trade button at the bottom right, and then we're gonna click on the buy button
and by default it allows us to invest in dollar amounts So if you wanted to put literally just a buck into the S 500 you would hit and that would buy you 0 shares But for this example
we're going to invest our whole $20 that we have idle in the brokerage account. So we're going to
click on the edit button and we're going to type in 20 and then we're going to click on the review
button and this will be buying us 0.04131 shares. When you're all set, you go ahead and swipe
up. And just like that, we invested $20 into the S&P 500 ETF at an average price of $484.50 per
share. If we click on the done button, we can go ahead and click cancel here and then it will show
us our updated position. So now after that new purchase, I currently own about $59.16 worth of
the S&P 500 ETF. And my overall return is down 0.43% as the market has sold off recently. And you
can track your daily return as well as your total return from this screen in the app, or you can click
on the back button and hit back once again to get back to your home screen. And if you scroll down
here, you can see that I own fractional shares of Microsoft and then the Vanguard S&P 500 ETF
And if we tap on this here, we can change this to total return. And you can see that I am down a
little bit of money now in these two particular investments. But those are two ways that you can
track your investment using Robinhood. Now, the last thing I want to show you is how to enable
dividend reinvestment. That way you can maximize your return potential if you wish. You're going to
do that by clicking on the person icon at the bottom right and then the three lines in the top
left. From here, you're going to click on the investing tab at the very top and then you can
scroll down and you will see a section called dividend reinvestment and I currently have this
enabled. Yours is not going to be enabled by default. So if you want to enable it, you're
going to click on edit dividend reinvestment and you're simply going to turn that on. So what that
means is when I earn dividends from either Microsoft or VOO, that dividend is going to be
reinvested and used to buy additional fractional shares of that investment. And then those new
fractional shares are able to earn future dividends themselves. That's just how simple it is to invest
in the S&P 500. The last thing I want to show you is how to set up a recurring investment if you
wanted to do this on a routine schedule. We're going to scroll down here again and click on VOO
We're going to click on the trade button once again. We're going to click on buy. And at this
point, if we click in the top right, you can see where these different order types come up. And the
one we're looking for in particular here is recurring investment. So if we click on recurring
investment this gives us the option to invest on a set schedule whether it's every market day every
week every two weeks or every month so let's say for example you wanted to put five dollars per day
into the s p 500 you would click on every market day you would click on continue and then you would
type in five dollars and hit the continue button once again and you can choose your bank account
that you want to use if you want to have it deduct that automatically or you can simply have that
money come out of your buying power that you deposit from your bank account if you don't want
to have all of those microtransactions taking place and if you wanted to instead do this on a
monthly schedule you would say every month and then click on continue and let's say you wanted
to put 200 per month into the s p 500 you would then click on continue select one of your bank
accounts click continue once again and if you actually wanted to move forward with this at this
point you would click on the review button and then confirm and then you would fully automate
this strategy of investing in the s p 500 so that's it for the basics here and again if you
want to learn more about robin hood be sure to check out my full 45 minute tutorial which is
going to be in the corner or also down in the description below at the beginning of this video
i mentioned it was possible to become a millionaire following this index fund investing strategy so
So let me prove it to you now using this compound interest calculator
Now earlier on, we mentioned that the average return from the S&P 500 is about 10% annually
according to NerdWallet. So we're going to be assuming that that is the return that you are experiencing
And we're going to put in a 10% return here in the estimated interest rate section
We're going to be assuming that you're investing $500 per month with no initial amount of money
to start with as most people are starting out from the $0 line
So let's say you went ahead and followed this strategy for 10 years
We're going to type in 10 under the length of time in years, and then we're going to click on the calculate button
So if you followed this strategy for 10 years, you would have a portfolio value of just under $100,000
and your contributions would be about $60,000, meaning that you've made about $35,000 in returns from the market
Now we're going to push this out to the 20-year mark and see where things are at
Now most people would think that if you went from 10 years to 20 years, your portfolio would be worth roughly double, or about $200,000
But this is where you will see the magic of compound interest beginning to take place
So we're going to click on the Calculate button, and you can see here that the portfolio would grow in value to about $343,000
which is significantly more than double what we were at before. If we take a look here, your total contributions would be 120,000, and the value is about 343,000
which means you've made about 220,000 in capital gains from the market
But you want to become a millionaire with this strategy. And the crazy thing is, it only takes an additional 11 years to hit that mark with this example here
So if we scroll up here and push out to the 31-year mark, and then click on the Calculate button once again
you would have a portfolio worth about 1.09 million. And here's the crazy part
Your contributions were only 186,000 and your portfolio is worth over $1 million
That means that you've made about $900,000 in capital gains from the market
And you can see this red line accelerating at a faster and faster rate
And that is thanks to the compounding effect of the stock market especially when you reinvest your dividends and those dividends are able to earn future dividends themselves Now what we covered so far is the Vanguard S 500 index fund investing strategy
but Vanguard offers dozens of different types of ETFs, and there's also other ETF and index fund providers that you might want to be aware of
Let's jump over to the Vanguard website now, and I'm just going to show you a quick overview of all of the different types of ETFs that Vanguard offers
Vanguard currently offers 86 different ETFs or exchange traded funds and all of these are going
to have a different goal and then asset mix associated with them. So if we scroll through
here we can see for example VOX is their communication services ETF. They also have
bond funds for example like this one right here VCRB the core bond ETF. But what we're going to do
here is scroll up and sort this by asset class. That way we can get a breakdown of the different
types of ETFs. So at the top here, we have all of these different bond funds. This one right here
being one of the most popular BND, the total bond market ETF. This is one that a lot of people will
mix in with a S&P 500 investing strategy once they are looking to diversify out of equities and have
more money in stable assets like bonds, for example. Moving on from bonds, we have international
investments for those that are looking for global market exposure outside of just the United States
The most popular among this would be VT, which is going to be the Vanguard Total World Stock ETF
which instead of just investing in the United States stock market, you're investing in the
entire global stock market at that point in time. If we keep scrolling here, you can see they also
have large cap funds, mega cap funds, and there's also a dividend appreciation ETF. And there's also
a high dividend yield ETF, which is probably on the next page. So if you have different goals in
mind, you may find that some of these different Vanguard ETFs are a better fit for your investment
strategy. And then we have the sector specific ETFs, which are going to be investing your money
in one segment of the US economy. So for example, there's communication services, consumer discretionary
consumer staples, energy, etc., financials, healthcare. So if you wanted to have exposure
to just one particular segment, that could be accomplished through one of these sector-specific
ETFs. But keep in mind, the best approach in most cases is to have diversification across all of the
different segments of the U.S. economy. And then, as mentioned earlier, there are other index fund
and ETF providers that you might want to consider. One of the most popular being Fidelity, and they
have a similar list on their website where you can go through all of the different ETFs that they
offer and learn about what the particular goal is and what that asset mix is. So if you're further
exploring the world of index funds and ETFs, you might want to also look into these different
providers. The last detail I want to cover here is the taxes associated with an index fund investing
strategy. And the type of investment account that you use is going to have a huge difference on the
amount that you end up paying in taxes. If you invest through a taxable brokerage account, you
will most likely end up paying long-term capital gains tax rate on your investments so long as
you're holding on to them for more than one year, and that caps out at 20% for federal, and there
could be additional state taxes owed too, depending on where you live. Now, in the previous example
looking at this index fund millionaire strategy, we looked at investing $500 a month for 31 years
and earning the average 10% return from the S&P 500. And in this example
we ended up having a total account value worth about 1.09 million
but the amount of money that you invested would only be about 186,000
That means if you cashed out this portfolio all at once, you would have about $905,000 in capital gains
And at a 20% tax rate on the federal level for the maximum long-term capital gains tax rate
that would be about $181,000 in taxes. And if that wasn't bad enough already
you would also owe taxes on the dividends that you were earning along the way
even if you're reinvesting them. So for example, if you were earning a 1.3% yield on a $1 million account
that would be $13,000 per year in dividends. And the tax rate on dividends can also be as high as 20% for qualified dividends
So that would be $2,600 per year that you would have to pay out of pocket or selling off a portion of your portfolio to pay those taxes
But if you invest through a retirement account, specifically a Roth IRA, you can shelter yourself from the capital gains taxes as well as taxes on your dividends
With a Roth IRA, you are contributing your post-tax dollars. And that means there is no upfront benefit, but there are major benefits at the end
So long as you don't touch the earnings in your account until the age of 59 and a half
all of the capital gains, whether they are short-term or long-term, as well as the dividends that you earned, are completely tax-free
Now, there are a few other basic requirements and stipulations for the Roth IRA
and I do have a full video about Roth IRA investing that I'll put down in the description below
so I would highly recommend checking that out if you're considering this strategy
And if you do decide to invest with Robinhood, they do offer a Roth IRA retirement account
as one of the investment account options. And just like that, you are now an expert on passive long-term investing
This is the only strategy that works for everyone, and you can now sit back and relax while your
friends might be stressed out about their stock-picking strategy. Now, as you get older, you may want to diversify your portfolio into bonds and potentially other
fixed income or alternative investments, so keep that in the back of your mind and consider
consulting with a financial advisor once you build up some substantial assets
If you made it to the very end, don't forget to drop a like on this video as well as subscribe
and hit the bell for future notifications. In addition, if you want to get that free stock
worth up to $200 when you open a Robinhood account, don't forget to use my affiliate link
in the description below or visit ryanoscribner.com slash Robinhood. You can click below to watch my
video about the Roth IRA retirement account and I hope to see you there