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You’ve already invested in yourself to increase your income potential, and your business is doing fine. What’s next?
As entrepreneurs, it’s natural to want to poor as much money as we possibly can back into our companies. Perhaps surprisingly however, this isn’t always the best option.
In the same way you’ve been told never to invest in one stock, it’s not always a wise choice to put 100% of your extra money back into your own company either. There is a lot of power in diversification. And while your own business is likely to generate the best returns, there’s a lot of value in investing elsewhere as well.
Rather than investing a lot of time and money learning how to pick stocks (only to make less money), I have one investment that is ideal for entrepreneurs, and really isn’t that complicated to get started.
That investment is called index funds / ETFs, and they offer plenty of benefits that you can’t get anywhere else.
In this article, I’m going to cover these benefits in detail, share my own personal portfolio, and explain how you can get started.
What Actually Are Index Funds / ETFs?
You can think of these like ‘baskets’ of stocks, that cover a specific market index.
For example, an S&P 500 index fund would contain a tiny piece of all 500 companies in the S&P 500 index. Rather than having to buy and manage shares of each one of these individually (which would not only require a lot of money, but would also cost a ton in transaction fees), you can buy a smaller piece of all of them at once.
Index funds and ETFs are essentially the same thing, but trade a bit differently. ETF stand for exchange traded fund, and you can buy and sell these just like you would any other stock.
Index funds however are a mutual fund, managed by a brokerage. This means your purchase is priced in at the end of each trading day.
There are slight advantages and disadvantages to each of them, but the underlying fundamentals are the same – you are buying a tiny piece of every company in the underlying index.
Note that there are many different index funds and ETFs available for purchase, and I will illustrate these later when I share my personal portfolio.
Why Are Index Funds And ETFs Such Great Investments?
There are a number of key benefits of index investing, so let’s get into them!
1. Most Professionals Won’t Outperform The Market Index
This ones probably the most important, considering that the sole purpose of investing is to make as much money as possible.
Less than 2% of professionals will outperform the market index for any extended period of time. These are people that spend all day analyzing stocks, with technology, insights and tools that the average person will never have access to.
It just doesn’t make sense to try and pick and choose stocks, if you’re more-likely-than-not to make less money.
Especially since there are a number of other important benefits that index investing offers as well.
2. Index Investing Requires Very Little Time
If you’re busy running your own business, you probably don’t have time to spend analyzing stocks, keeping up trends, or try to find those “hidden gems” you hear about from time to time.
Index investing is simple. I have my entire portfolio split up between 4 ETFs. When I make purchases twice a month, I simply check to see which ones I need to purchase more of, and place the order.
The whole thing takes less than 10 minutes each month.
Once you’ve decided what funds you want to hold in your portfolio (which I’ll discuss later) than you really don’t have to think that much about it anymore.
The savings on both time and headaches are astronomical.
3. Low Fees
When you invest in actively managed mutual funds, you’ll usually have to pay high fees for the work involved. This is typically referred to as the fund’s expense ratio.
The fees are often a percentage of your total investment. For example, a $10,000 investment into a fund with a 0.5% expense ratio would have an annual fee of $50. If your investment doubled to $20,000, that fee would become $100, assuming the fund’s expense ratio hadn’t changed.
It doesn’t sound like a lot, but it can really make a big difference – especially over a long period of time.
Typically, active managed funds have an expense ratio of around 0.6-0.7%. Index funds usually have an expense ratio around 0.1% or lower.
If you were to invest $25,000 in the market and let it grow for 30 years at a 10% return, the difference becomes clear:
0.1% Expense Ratio: $424,493.24
0.6% Expense Ratio: $370,219.82
Needless to say, the expenses can very quickly add up to a lot of money!
4. There’s Much Less Risk
Because you’re buying a very large number of stocks, there’s much less risk than if you were to pick and choose stocks individually.
As I write this article, the world is being hit with COVID-19, and entire industries are falling apart. Companies are going bankrupt, and their stock is in free-fall. When you hear of people ‘losing it all’ in the stock market, it’s always because they chose to pick and choose individual stocks.
The fact of the matter is, the market as a whole has always recovered. It may be down for years at a time, but if you don’t sell out when it’s at its low, chances are you’ll get your money back.
This isn’t to say the stock market will always be some magic investment vehicle that will spit out money for you, but index funds are about as safe you can get. Your risk is spread out across hundreds or thousands of companies, in every major industry.
My Personal ETF Portfolio – And How To Choose Yours
As mentioned earlier, I’m happy to share my personal investment portfolio. It’s plain, boring, simple, and it works.
Vanguard Total Stock Market ETF (VTI): 58%
Vanguard Total International Stock ETF (VXUS): 25%
Vanguard Real Estate ETF (VNQ): 7%
Vanguard Total Bond Market ETF (BND): 10%
There are a few things to keep in mind with this.
First of all, BND is a bond fund and VNQ is a REIT fund, which are a bit different than stocks.
To learn more about what bonds are and how they work, watch this video:
Typically, people increase the percentage of bonds they have in their portfolio as they get closer to retirement, as bonds are far less volatile than stocks are. Because I’m so young, I keep my percentage of bonds very low.
Secondly, the REIT fund isn’t strictly necessary – it is only a personal preference.
When choosing your portfolio, there is really only a few decisions you need to make:
- What percentage or your portfolio you want to keep in bonds. If you are more risk-adverse, you’ll want this higher. If you can weather market drops without panicking, you may want to keep this lower. A common rule of thumb is ‘your age in bonds’ or ‘your age in bonds -10’. So for example, if you’re 35 years old, you’d have 35% or 25% of your portfolio in bonds, if you follow this rule.
- What percentage of your stocks you want to have in international vs. U.S funds. I’ve settled for making it 25% of my total portfolio. I may bump it up to 30% sometime in the future.
- Anything else you want to carry. If you’re going to stray away from the primary stock funds, it would be best if you didn’t make it a large percentage of your portfolio.
How To Get Started
To get started investing in index funds or ETFs, you’ll need to open an account with a brokerage.
This process is pretty simple, and can be done in less than 20 minutes.
You may have noticed earlier that all of my ETFs are purchased through Vanguard. I highly recommend Vanguard because they’re a non-profit, with some of the lowest expense ratios in the industry. They have many more funds than what I’ve already mentioned here, and in 6 years of working with them I have never had any problems at all.
After signing up and verifying your information, you’ll transfer money from your bank to your brokerage. After it’s arrived, you’re free to begin investing on the next trading day.
That being said, there are some minimums you’ll have to adhere to.
For ETFs, the minimum purchase is 1 share. The most expensive ETF I mentioned earlier is VTI, which is trading at around $145 at the time of writing.
For the equivalent index funds, the minimum investment is $3,000 per fund.
All-in-all, the quicker you get started, the better! The biggest factor when determining how much money you’ll make in the stock market is time. The quicker you can begin investing, the more you’ll make as your earnings compound.
Achieve Financial Independence And Retire Early
Believe it or not, it’s actually possible to live entirely off of the income the stock market produces for you, and safely be able to retire early if you choose to do so.
If financial independence or early retirement is something that interests you, I have an entire course on this subject that I’m currently selling for $97.
Not only does it go into all of my investment strategies in much more detail, it will also help you to develop a plan to cut your living expenses, structure your life to accelerate retirement, and adjust to life after you get there.
The fact of the matter is, retirement in your 30’s and 40’s really is possible, but it takes a smart strategy to achieve that.
I don’t really believe in the concept of passive income, but investing in index funds / ETFs is about as passive as it can get.
While you should always invest in your own education and skill set first (alongside your business), there’s a lot of benefits that investing in the stock market can bring as well.
Just like you wouldn’t put all of your money into only one stock, it’s safer and smarter to diversify your earnings elsewhere too.
With this article, I hope I’ve made the case on index investing, and the benefits it can provide to you as an entrepreneur.
This is something I’ve been doing myself since the day I turned 18, and I have a lot of experience with it today. If there are any questions I can answer for you, please don’t hesitate to let me know below.
To your success,
– James McAllister