Retirement? Oh my god, I’m not that old… am I? It doesn’t matter if you’re 20 years old or 60 years old, financing your retirement should still be a priority on your list. If the elders tell you that “you’re too young to be thinking about retirement” just remember this example: if you started saving in index funds in your 20s instead of your 30s at a rate of return of (let’s be conservative) 6% year-over-year you would have doubled your money in 12 years and tripled your money in 24 years. If you start investing when you’re 20 years old, by the time you reach the age of 44 the money would have tripled, where if you started investing at the age of 30, you would have only doubled the money by the time you are 44. Which one do you think is a better deal, double or triple?
If you are confused about index funds, don’t worry because this article will aim to simplify the concept. If you are interested on how to get involved in the stock market, check out Blaine’s article.
On television, you hear a lot about mutual funds or if you ask your financial savvy friend, s/he will tell you to buy a mutual fund, but why do so? Mutual funds are great, they are safe and most have a great dividend but what many people won’t tell you, their fees are outrageous. When you look at a mutual fund’s marketed return rate, it is not the actual rate of return because it doesn’t include fees. If the fees were included, the rate of return would be a lot less attractive. On Fools.com there was an article that made a very interesting point about mutual funds. “There’s a reason that all these magazines don’t tell you how simple mutual fund investing really is. Scientific marketing surveys and focus group testing have determined that magazines with covers that read “Index Funds: Still The Best Choice!!!” every single month really wouldn’t sell as well as magazines that promise “Our BRAND NEW 10 Best Mutual Funds To Buy RIGHT NOW!” Sad, but true.”
What is an index fund? An index fund just mirrors the stock market. There is no need for an active manager to manage the portfolio (unlike a mutual fund) so the fees are really, really low. If the stock market raises, the index fund raises, and the opposite is true. This is very important because if you’re thinking about your future, you should also care the future of the country you live in, and the type of money you use. The reason is because if the country doesn’t do well, you finances won’t do well.
The S&P 500 is always flashing on the TV screens because it’s a really good measurement of the United States economy. This index takes 500 US companies from different sectors and keeps track of their stock prices. If these companies are doing well, the economy is doing well. Now, by investing in an index fund that mirrors the S&P 500, you are betting that the US economy will do well in the long run.
Are you willing to take this bet? If not, you should reconsider your patriotism. This is the best bet you can make because if the US economy collapses, the value of your paper dollar will be worthless… so even if you don’t invest, the value of your dollar will still be worthless.
Let’s look at the 4 scenarios I created:
- If the US economy does well and you’re investing in an index fund; your profits will soar.
- If the US economy doesn’t do well and you’re investing in an index fund; you will lose money.
- If the US economy does well and you’re not investing in an index fund; your dollar will be valued less in the future. Read this article to understand the ‘hidden tax’.
- If the US economy doesn’t do well and you’re not investing in an index fund; your dollar will be valued much, much less.
If you’re into math, you will realize that if you don’t invest: it’s a lose – lose situation. Where if you do invest you have a 50% chance of winning. Which odds do you like better?
If you are interested in index funds, you should look at the Fidelity index funds or Barclay’s index funds which track the S&P 500. However, also check out these links below to get a better understanding on index funds and why they’re important for your retirement.