Index Investing Investment guide

Warren Buffett

Wall Street does not want you to know the statistical fact that index funds outperform actively managed funds the majority of the time.

Index funds cut management and marketing costs, reduce transactions costs, defer capital gain, control risk, and beat the vast majority of actively managed funds leaving more money in your pocket.

Index Investing is an online investment guide geared towards simplicity. Index Investing gives very straight forward examples of how to construct a rock solid well diversified index portfolio at low cost.

The best way to own common stocks is through index funds. Additionally, those index funds that are very low-cost (such as Vanguards) are investor-friendly by definition and are the best selection for most of t hose who wish to own equities
- Warren Buffett

Buy the whole market

By owning the entire market you are guaranteed to receive the average return of all investors. It may sound bad to be average but in this situation it is a great thing since the majority of investors do worse than average. The thing fund managers dont want you to know is that with the fees and taxes inherent to actively managed funds index funds outperform them consistently every year.

"Most of my investments are in equity index funds."
- William F. Sharpe, Nobel Laureate in Economics

So investors shouldn't delude themselves about beating the market?
"They're just not going to do it. It's just not going to happen."
- Daniel Kahneman, Nobel Laureate in Economics

Over the past 30 thirty years more than two-thirds of professional portfolio managers have been outperformed by the S&P 500 index
-Burton Malkiel, Professor economics Princeton university

Hold close to your age in bonds

John Bogle

Stocks provide us with a share of whatever index we are tracking for instance the entire US or the world economy. The trade off of the high return is risk in the form of market fluctuations, many of us learned about that in 2008. There are also times when there is no growth at all for decades. Having the correct allocation of diversified foreign and domestic stocks and bonds in your portfolio is essential. Bonds often move in the opposite direction of stocks and function as a ballast to keep your portfolio balanced.

Take someone who is 45. They should be 70 percent stocks and 30 percent bonds.
- John Bogle

Be tax efficient

The most important thing to achieve tax efficiency is to leverage tax advantage accounts in your portfolio. This keeps the IRS out of you pocket allowing the magic of compound interest to occur. Bonds are very tax inefficient so they should be held in a 401k or and IRA. Equity index funds are very tax efficient so they are suitable for non tax sheltered accounts.

The fund industry's dirty little secret : Most actively managed funds never do as well as their index
-Author Levitt, former chairman of the securities and exchange commission.

First investment

For our first investment portfolio we will use vanguard funds because of their Low cost and investor friendliness. The three index funds cover the Total US stock market, Total world stock market, and Total US bond market. The investment strategy here is to create a core portfolio that gives total asset diversification in 3 funds for extremely low cost.

Index Investing recommends you hold close to your age in bonds and 1/4-1/2 of your stocks in foreign stocks.

Below is an example investment template for a 40 year old using these guidelines. It is this simple to build a rock solid diversified portfolio of low cost indexfunds.

40% Total Stock Market Index (VTSMX)
20% Total International Stock Index Fund (VGTSX)
40% Total Bond Market Index (VBMFX)

That's it! Once this is setup just rebalance the funds once every 2 years.

Outstanding books I highly recommend.

For the Beginner and advanced investor:
The Bogleheads' Guide to Investing

Timeless classics that always stay relevant:
Common Sense on Mutual Funds
The Four Pillars of Investing
A Random Walk Down Wall Street

Charles Schwab

Charles Schwab

"Buy index funds. It might not seem like much action, but it's the smartest thing to do."

- Charles Schwab

Investment resources