Investing Made Simple

See Affiliate Link Note and Disclaimer at end of article

Introduction

I wrote this article because of several conversations that came about after my two recent articles, A Different Graduation Gift and Social Security: Avoid falling for a false retirement plan.

The following are fundamental questions and concerns that came up in these discussions:

• Why should I risk my money in the stock market?
• The stock market is at an all-time high. There has to be a period when the market pulls back.
• I don't know what stock I should buy.
• I'm not smart enough to make these decisions and I don't have enough money for a financial advisor.

S&P 500 Historical Returns

I want to address the first two bullets with the following chart. Since its inception in 1928, the S&P has had an average annualized return of 9.90%. Since it expanded to include 500 companies in 1957, the S&P 500 has an average annualized return of 10.26%. Adjusting for inflation, the historical annual return rate is 6.37%.

If you are not investing your money into the stock market and just have it stored in savings, you are losing money because of inflation. The average inflation rate since 1970 has been approximately 3.94% per year.

What does that mean? It means that your dollar does not go as far as it used to. For example, a Snickers candy bar cost about 10 cents in 1970 and costs about one dollar today. Here are other examples.

Although people understand the term inflation, it is hard to conceptualize. Let's simplify.

If you had $1,000 in 1970, you would have been able to purchase 870 gallons of milk ($1,000 / $1.15). If you put that $1,000 into a typical savings account (with an average of 0.47% Annual Percentage Yield), you would have approximately $1,285 dollars today. You could withdraw your money and purchase 367 gallons of milk ($1,285 / $3.50). Your money lost 503 gallons of milk in purchasing power.

What if you invested that same $1,000 into the stock market? I will use a conservative rate of 7% (versus the current average of 10.26% since 1957).

If you had invested $1,000 in the stock market in 1970, you would have approximately $38,000 today. After accounting for taxes on capital gains (assuming 15% for long-term capital gains), you could purchase over 9,000 gallons of milk (($38,000 - 15%) / $3.50).

Index Fund Recommendations

To address the question, "I don't know what stock to buy," I agree. Do not pick any single stock or a handful of stocks to buy with money that you want to be invested in your future, such as for retirement.

It is impossible to pick winners and losers in the long-term. Many "smart" people have lost a lot of money trying to pick winners. Do research on companies like Enron that were supposedly too big to fail.

If you want to invest in individual stocks because you are hearing a lot of excitement about Tesla, Nvidia, Amazon, Microsoft, etc., use your "extra" money that you are willing to lose. Think of it as your gambling money and keep it less than 5% of your entire portfolio.

For the serious investor that wants to take the slow, steady, and reliable approach, invest in a total market index fund. The following table shows the index funds most favored by those in the Financial Independence, Retire Early community.

The orange highlighted row is to bring attention to the more preferred index fund because they are the S&P 500 index funds based on which brokerage you use (Fidelity, Vanguard, or Schwab).

Example from Fidelity's Index Fund Historical Charts

In full transparency, I have been purchasing Fidelity's FSKAX. When comparing Fidelity's version of Vanguard's VTSAX (Total Stock Market) fund, this was the one that made the most sense to me several years ago.

The picture below compares the four Fidelity index funds referenced above, plus the FSKAX fund that I've been purchasing.

The chart below shows the hypothetical scenario if you had invested $10,000 ten years ago. If you had invested $10,000 in FXAIX ten years ago, you would have approximately $32,000 today (a gain of $22,000).

Comparing S&P 500 Index Funds by Brokerage

I also want to provide a quick comparison of the S&P 500 index funds from Fidelity, Vanguard, and Schwab. As you can see, they are basically identical in performance. But take notice of the little orange dollar sign ($) to the left of the Schwab and Vanguard funds. That tells you Fidelity will charge a transaction fee ($75) if you purchase the Vanguard or Schwab equivalents of Fidelity's S&P 500 index fund.

Basically, if you are with Fidelity, purchase Fidelity's fund. If you are with Vanguard, purchase Vanguard's fund.

Financial Advisor

I want to finish this article and address your ability to do this yourself. I believe you can.

There has been a lot of conversation on the value of a financial advisor, especially those that charge a percentage of your portfolio (usually 1% - 2%). For example, if you have a $100,000 portfolio, you can expect to pay $1,000 - $2,000 as an annual fee. This means you have less money that works for you. It works for them.

Warren Buffet, in his 2013 letter to Berkshire Hathaway shareholders, believed a strategy of 90% of your portfolio in a low-cost S&P index fund and 10% in short-term bonds would outperform most financial advisors (Berkshire Hathaway Inc., n.d.).

Sweeney and Sweeney (2024) state, "we have several decades of track record showing what academics have known all along – index funds outperform the vast majority of their peers over the long run."

If you use the strategy outlined above, you can do this yourself and build your confidence.

One last thought on Financial Advisors: there are fee only advisors, such as $150 per hour, whom you can leverage and discuss your portfolio, strategy, and questions.

I take advantage of this approach. I handle all of my investing, but I meet with a fee-only financial advisor 2-3 times per year. During this time, we discuss my retirement plans, and he uses a tool to model my financial projections through 100 years old, accounting for my expenses, investments, estimated social security, and my future purchases such as needing a new car in 5-10 years. I find great value in the models and discussing the hypothetical scenarios.

Build Your Confidence

I recommend the following books to read. They will help build your confidence and you will feel more comfortable managing your own portfolio and planning your future.

• The Simple Path to Wealth by JL Collins
• The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich by David Bach
• The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey
• Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Fully Revised and Updated for 2018 by Vicki Robin
• Financial Freedom: A Proven Path to All the Money You Will Ever Need by Grant Sabatier

Affiliate Links

This article uses a few affiliate links for the books. I may receive small compensation if you purchase any books from the link.

Disclaimer

I am not a certified financial planner, and any financial numbers and strategies are for discussion only. Seek professional advice from accountant and/or professional financial planners. But do NOT use a financial advisor that wants to manage your assets for you (known as Assets Under Management at 1%+). Select a pay by hour or visit only.

Thank You

If you find this piece interesting or helpful, please consider leaving a heart, a comment, or even a tip. Your support means a lot to me as a hobbyist writer. Plus, it helps with the algorithms.

Sources

Berkshire Hathaway Inc. (n.d.). Berkshire’s Corporate Performance vs. the S&P 500. https://www.berkshirehathaway.com/letters/2013ltr.pdf

Sweeney, J., & Sweeney, J. (2024, April 9). Why your financial advisor doesn’t use index funds – and how it’s hurting you. SwitchPoint Financial | Flat Fee Only Financial Advisor Lehi Utah. https://switchpointfinancial.com/why-your-financial-advisor-doesnt-use-index-funds-and-how-its-hurting-you/