Investing Basics: Choosing Index Funds over Stocks

I preach index funds because the numbers make sense. Investment terms can be confusing if you don’t have a guide, which I’m more than happy to hand you for your future success. Let’s look in depth at why index funds are better than stocks before I walk you through what index funds you should look at for investments.

Important note: I am NOT an accredited financial advisor and none of this should be taken as professional financial advice. See my Disclaimer page for more detail.

The History Lesson in Investing

Let’s say we transport you back to 1997. You decide you’re going to do your research and pour your money into stocks you’re positive will do well long-term; you don’t even think of index funds in your stock market fantasies. Some of it goes into those new-fangled software companies, but you know you need to diversify so others will go elsewhere. Some’ll go into the travel industry. Some into a couple of the stores you to go to all the time, whether for entertainment or for every basic necessity.  Don’t forget a finance company that’s been around for over a century. And for funsies, let’s throw in a nice company that’s focused on selling books, which you love collecting. All safe bets, right?

Well, no. You can never guarantee how well a singular stock will perform in the long-term. I’ll demonstrate by revealing the names of these companies you’ve just invested in, along with sources of how spectacularly their stocks crashed and burned:

Software companies	Global Crossing, Pets.com, and Digex
Travel company	UAL Corporation (United Airlines holding company)
Entertainment retail	Blockbuster
Basic necessities retail	Sears
Finance company	Lehman Brothers
Bookstore	Borders (bet you thought it’d be Amazon, right?? WRONG, you didn’t know to buy Amazon in 1997!!!)

All of these stocks seemed like awesome choices in 1997, with rosy outlooks, great growth, and just about every reassurance you can think of for lasting success. But every single one will file for bankruptcy, leaving you holding the bag. You can’t exactly see the future, so you didn’t know how badly your handpicked stocks would perform. You could always try to obsessively read about the stock market, trying hard to buy at the absolute lowest and sell at the absolute highest.

Again, you can try. But out of the millions that have tried the same, hardly any of them were consistently good at it.

You Do Not Have Precognition

Don’t fall into the Warren Buffett trap and attempt to guru your way into riches. You are not Warren Buffett.

“But what if I am?!! You don’t know, Darcy!”

I know enough to know that you’re unlikely to be a finance professional who’s earned graduate degrees in finance and has worked as an investment banker for several decades. Those people are the ones I would’ve believed could come closest to consistently picking winners. You had to have picked up some insights in all that time, right?

Again, no. Out of all the smart fancypants dudes that pick stocks for a freaking living, roughly one in twenty will actually beat the stock market index. THAT IS A 95% FAILURE RATE. Among the population that’s gone to college for finance, has made a career out of finance, and is so obsessed with investing that they measure their buy/sell options down to the nanosecond.

Ninety. Five. Percent. Still. Fail.

Even if you manage to put as much blood, sweat, and tears into trading as they do, you’ve got a better chance of being accepted to an Ivy League school or successfully climbing Mount Everest than you do at beating the index. The odds just straight aren’t in your favor. It’s a place you’re near-guaranteed to lose if you try your hand at it.

If Not Stocks, Then What?

So now we’ve established you’ve got a near-zero chance of beating the stock market index. Sucks for you; I’m here to destroy all of your stock market whiz-kid dreams.

Only, not really, because there’s a better investment that WON’T lag behind the index while also being the most low-maintenance investment approach ever. You’ll still need to check in on your investment a few times a year, but that’s it. Best of all, it’s an investment approach that’s fine-tuned to perform consistently in the long term, which is the most important thing to consider in your 20s. And shifting your investment approach to it encompasses one cliched saying:

If you can’t beat ’em, join ’em.

Or, phrased as a gentle question:

If you can’t beat the stock market index, why not match it?

Because investing in a stock market index fund means you’re now investing in every single company on the ticker tape. This includes the losers that I’ve mentioned above, but it also includes all the astronomical winners you couldn’t have hoped to pick, like that other bookstore that became Amazon or that other software company that became Google. And, unlike your hand-picked stocks, the worst-performing ones automatically remove themselves from your portfolio when they’re taken off the market. In its place are better-performing ones that continue to make you richer.

Specifically, double-digits richer. In a gangbusters year you could see as much as a 25% return on your investments (or getting one dollar back for every FOUR you put in, netting you five dollars at the end of the year). Even with the shitty years (like 2020) where you see a zero or negative return, rest assured that it all balances out to a roughly 10% return overall. And “overall” is perfect when you’re young and have time on your side.

The Index Funds You Want

For more information on index funds I’d highly suggest perusing my More Resources page; I regularly reference insights from folks like Millennial Revolution and JL Collins, who have written extensively on the topic. For really quick and dirty directions, we’ve got a scene cut from an alternate-reality financial independence film:

Have you watch it? Cool. You’ll note that JL mentioned VTSAX about seven seconds in, which is the gold standard of stock market index funds. Every major investment firm out there also offers index funds, but VTSAX from Vanguard is the gold standard because of Vanguard’s history of caring about lowering the traditional price barriers to investing. Vanguard, and its founder Jack Bogle, were the very first to offer an index fund to the public; your options before him were actively-managed funds that were much pricier to run, thus keeping a lot of people from attempting to invest in the first place. No other investment firm has shown so much care about you from the get-go, which is why I also pick Vanguard as my main investment account. They didn’t even pay me to say that. I just like them that much.

And when I say “they lowered the price barriers to investing,” I mean the price is low. The expense ratio for VTSAX is 0.04% of how much money you have in it. That means for every $10,000 you have in your account, the fee to have it invested is $4. Vanguard is basically telling you “hey, we’ll automatically keep you invested in a tax-efficient fund that gives you double-digit returns on average, but to do that you have to give us the equivalent of four candy bars”. DEAL.

Was that even a question?!!

Vanguard also offers similar index funds like VTI and VTIAX, if you wanted to explore your full options. Another fund you might be interested in is one JL mentioned about twenty seconds in: VBTLX. That fund tracks the bond market instead of the stock market, and is a good fund to add to your portfolio if you’re really freaked out over market dips. If you’re in your 20s and just getting started, just the one VTSAX fund is more than adequate.

If you don’t use Vanguard, for whatever reason, there’s other good index funds out there offered by Fidelity (FXAIX) Charles Schwab (SWTSX) and iShares (IWV), amongst other firms. Some of them have slightly lower expense ratios, so if that extra two or three dollars means that much to you then by all means explore other options. Once I did, I still chose Vanguard regardless – their commitment to the customer (i.e. me and you) is both priceless and unbeatable.

My Own Returns

I first started investing in early 2017, beginning with $10,000 in savings that all went into VTSAX. In the 3.5 years since then I’ve grown my net worth to $140,000, thanks not only to my frugal habits and income gains but to my investment growth as well. And, as I’ve calculated in a previous post, that much is going to net me a million dollars by the time I hit retirement age.

Age	Investment Growth (7% return + $40k yearly savings)
25	$107,000
26	$157,290
27	$211,100
28	$268,677
29	$330,285
30	$396,205
31	$466,739
32	$542,211
33	$622,965
34	$709,373
35	$801,829
36	$900,757
37	$1,006,610

Index fund investing is projected to net me A LOT of money. I want you to get those gains as well, since this profitable investment strategy is also the easiest.

And the sooner you start, the better off you’ll be.

My brother’s been learning all of this from me and will know to invest right out of the gate after graduating college. He plans on majoring in finance and is choosing his school based on where the top financial centers are in the country, so he can network with the companies he finds most interesting and (hopefully) score a job offer at some awesome firm. Finance people make a lot already, and he estimates he’ll be in the tens-of-millions range by the time he’s fifty.

Imagine that: having two million dollars for every decade you’ve been alive. When I was 22 I celebrated having a $22,000 net worth, thinking it was so cool I had a thousand dollars for every year I’ve been on the planet. The younger you start investing in this way, the greater the spoils later on in life.

Main image credit: Sven Wilhelm via Unsplash