It's a very simple decision: 'Do I have enough money each month to put aside, and where should I put it?' My recommendation is to put it in an index fund, particularly as a younger starting investor.
One of the great features of index funds, and broad-based, ETFs, is that you get the advantage of broad diversification, you get many stocks.
So if you, let's say, invest in an index fund or some… the S&P 500, it would be 500 companies. They represent about 70% of Americans' value of stocks. We have a fund called the Schwab 1000. It's a thousand stocks, represents about 85% of the companies' value in the United States. That is, of course, very broad diversification, and so if there's one industry that goes up, oil, for instance, and another one going down, utilities going down, you have an investment in every major, ah, sector of the economy
In the first video of this series, we looked at the importance of investing in stocks to grow your wealth.
But choosing the companies and industries that will deliver the best earnings growth is a real challenge.
Competitive trends, management's ability to execute on their plans and unpredictable events, make it very hard to forecast results with success and consistency
Most people just don't have the interest, time or expertise to pick individual stocks well.
Multiply that effort by the many individual stocks you'll likely need for a well-rounded portfolio and the complexity adds up quickly.
Research shows how difficult it is even for the pros to actively buy and sell individual securities and match the market's performance.
So to get the best chances of building a portfolio that is designed to grow, and to get invested in as many different companies in as many different sectors as you need to be well diversified, what do you do?
One of the easiest and low cost ways to get invested in as many companies as possible is to invest in a mutual fund or an exchange traded fund – an ETF –to own a basket of companies. And a smart approach to that is index investing, which provides two important advantages – diversification and minimizing costs.
You're probably already familiar with indexes such as the S&P 500, DOW Jones, or the NASDAQ.
In fact, when people talk about the stock market, they're usually thinking about an index.
And while you can't invest directly in an index, many mutual funds and exchange traded funds, or ETFs, track these indexes, often simply holding the same stocks in the same proportions as are in the index.
Index funds can give you broad exposure to the market. Some are so broad, in fact, that buying them means you own a tiny piece of almost every public company in America, with just one investment!
Index investing can be a useful tool for both experienced and inexperienced investors, to form the core of a well-diversified portfolio.
When it comes to investing, controlling costs is important. In fact it's one of the few things you can control.
Index funds are typically low cost compared to either buying stocks individually, where you pay a commission for each purchase or sale, or investing in actively managed funds that choose stocks and make trades.
And with the advent of ETFs, costs dropped dramatically.
Now, you can get access to the entire US broad stock market for an annual expense of .03%.
That means that on a $10,000 investment, your expenses would be $3 a year to own about 2,000 stocks!
Lower costs means more money stays working in your portfolio. And, over time, this can have a big impact on your outcome.
To me, there's lots of confusion in the discussion about investing, and you want to make it simple. Some parts of the industry make it too complicated. Look for the firms, look for people who make it simple for you.
The Dow Jones Industrial Average™, also referred to as The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.
The NASDAQ Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks.
The S&P 500® Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity and industry group representation.
Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.
Investing involves risk, including possible loss of principal. Broker-assisted trades may have additional charges.
Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab Funds®, and Charles Schwab & Co., Inc. (Schwab), Member SIPC, the distributor for Schwab Funds, are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. CSIM is the investment advisor for Schwab ETFs™. Schwab ETFs are distributed by SEI Investments Distribution Co. (SIDCO), One Freedom Valley Drive, Oaks, PA 19456. SIDCO is not affiliated with CSIM.