Recently I wrote how investing a little each month will make you rich [What is Dollar Cost Averaging? Drip Your Way to Millions]. The question remains of where should you place this money each month?
I have an idea, though it is rather boring–yet it can make you rich. Let me tell you why investing in boring index mutual funds can make you rich.
Boring Index Funds Can Make You Rich: Being Above Average is Tough Stuff
I love to be above average, don’t you? Here is a little secret I learned–all the above average people from around the world move to cities like New York and Los Angeles. Thus to be above average in such a world class city, you must be in the top percentage of the U.S. and maybe even the world to stand out.
To be above average in the investing world year in and year out is nearly impossible. Yet, millions of investors are following fund managers who are trying to be better than average.
Some years they succeed and some years they fail. What results are higher fees and taxes associated with the mutual fund due to buying and selling seeking gains.
For most investors, being average combined with dollar cost averaging is good enough to reach millionaire status.
Boring Index Funds Can Make You Rich: An Average Batting Average Makes Millions
If you know anything about baseball, you’ll recognize that professional baseball players can make a lot of money.
Let’s take Aubry Huff, 1st baseman for the 2012 World Series winning S.F. Giants, as an example. He made a cool 10 million and batted .207 in regular season play. (The best 2012 batting average was Buster Posey at .336)
While batting average isn’t the only value Mr. Huff brought to his team, he was in fact average–hitting about 2/10 pitches, yet he makes millions.
Index funds can help you do the same.
Why Boring Index Funds Can Make You Rich: Be the Benchmark
What is an index fund? An index fund is formed from a major measure of the stock market, like the S&P 500 Index or the Russell 2000 Index.
An index fund is a mirror of these measurements. Thus an S&P 500 Index Fund is a combination of the largest 500 companies as reflected by the S&P’s rules of inclusion for their index.
Here’s where it becomes ironic. These measures on which index funds are based are the benchmarks in which managed funds are trying to beat.
Why not become the benchmark and be average. Sure, you might not strike it big some years, but you won’t also hit as low of bottoms either.
Index funds have:
- Lower expense ratios and fees than managed funds.
- Less ‘turnover’- buying and selling of stocks through the year resulting in more taxes.
- Index funds outperform most managed funds over the long term. Need proof? #1 #2 #3
What are your thoughts or questions about investing in index funds?