Why Boring Index Funds Can Make You Rich

Brent Pittman —  08/07/2014

Previously 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. Gather around home plate and I”ll tell how investing in boring index mutual funds can make you more money than a minor league pitcher.

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

Lego batter

Baseball players only have to be average when batting. Credit  eva.pébar.

If you know anything about baseball, you’ll recognize that professional baseball players can make a lot of money.

Let’s take Aubrey 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
It is very difficult to predict which funds, the small percentage that do exists, will beat the benchmarks over the long term. Can you find a needle in a haystack? Index funds are one of the few places where being average and boring isn’t a bad thing. In fact index funds could make you rich.

 

*As always consult an investment professional before beginning investing or changing your investing strategy.

 

What are your thoughts or questions about investing in index funds? 

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
  • http://www.pipstoday.com/ Shawn James

    Exactly, I like index funds because Index funds, meanwhile,are much lower maintenance and tend to have much lower costs. Most investors aim for above average returns in investing but most fail. Most even fail to achieve average returns. You can guarantee the market average by investing in index funds.

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  • http://twitter.com/RFIndependence Pauline

    I have only invested in index funds as far as stocks and shares go. I have one US, one UK, one Europe and one Pacific at 25% allocation each. I invest monthly to average the cost and they do pretty well on their own. I like removing emotions from the investment.

    • http://www.ontargetcoach.com/ Brent Pittman

      Good for you! Emotional investing and trying to time the market make for poor returns.

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  • http://www.lifeofasteward.com Loren Pinilis

    I’m a huge fan of index funds as well. But do you think the S&P 500 is the best index or another index, like ones that invest in more small-cap companies or foreign companies? I’ve been toying with switching from 100% S&P500 to maybe 40/40/20 into three different index funds.

    • http://www.ontargetcoach.com/ Brent Pittman

      Loren, Diversification is best even with index funds. Do a little research on the Boggle head forums and you’ll find examples of how to diversify index funds. http://www.bogleheads.org/forum/index.php

  • John@TheMoneyPrinciple

    Buying a composite fund like an index fund or ETF does ensure a degree of safety but I think I will be looking for a better ROI if we want to grow our retirement pot! We will see….

  • AverageJoe

    Exactly why I live in Texarkana, Texas, right here: “all the above average people from around the world move to cities like New York and Los Angeles.” Medium fish in a tiny pond of below-average people.

    • http://www.ontargetcoach.com/ Brent Pittman

      Too funny! I will be joining a smaller pond myself soon.

  • http://www.mymoneydesign.com/ MyMoneyDesign

    The Vanguard 500 Index Fund Admiral Shares (VFIAX)
    has the LOWEST expense ratio I can think of! 0.05%! Not bad for an annualized 7% return!

    • http://www.ontargetcoach.com/ Brent Pittman

      I hope to qualify for Admiral Shares at some point soon. I think you need 10K per index fund to qualify.

  • krantcents

    The majority of my investments are in mutual (index) funds. It keeps the costs low and I am not chasing returns. I don’t like running from one fund to another anyway.

    • http://www.ontargetcoach.com/ Brent Pittman

      Great point about chasing returns! I’d rather focus my time on making more money to add to the funds.

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    I agree. Most of my investments are in index forms in one form or another. I love the low fees.

    • http://www.ontargetcoach.com/ Brent Pittman

      Lance, I love the low expense fees. They can really add up to a lot of savings over time.