Building wealth and becoming a millionaire doesn’t have to be complicated. The most important things to building wealth are consistent contributions to a diversified fund over a long period of time.
This is best achieved through what’s called an index fund.
What are Index Funds?
Index funds are a type of mutual fund that tracks and matches the performance of the market in general.
The most common type of index fund is the S&P 500 Index fund but you can find others that range from small-cap to large-cap and international index funds as well.
The main benefits of an index fund is that you receive a broad market exposure at a very low cost to you.
How are Index Funds Different than Mutual Funds?
The main difference between index funds and mutual funds in general is that index funds are passively managed while mutual funds are actively managed.
Passively managed funds simply go up and down and follow the market. It doesn’t take any brainpower to think about buying or selling certain stocks in the fund because the fund is just meant to track it.
On the other hand, actively managed funds have a fund manager buying and selling stocks on a weekly or even daily basis to try and outperform the market in general.
The downside of actively managed funds is that their expense ratios are much higher than index funds, sometimes a whole percent higher.
For example, an index fund expense ratio may be 0.14% while a mutual fund expense ratio is closer to 1.25%
What Warren Buffett Thinks About Index Funds
Warren Buffett is a huge believer in index funds. He has said to “consistently buy an S&P low-cost index fund”.
From the most legendary investor of all-time, that seems like pretty simple advice.
Buffett goes on to say that buying this type of index fund “makes the most sense practically all of the time”.
Why You Should Start Investing in Index Funds Today
I’m glad you asked! The best time to start investing in index funds was yesterday. The next best time to invest is today!
Assuming a 9% return on an index fund and you invest $10,000/year, you would only have $133,963 after 10 years.
But, if you keep investing for 20 years, you suddenly start to see a lot more growth thanks to compound interest. After 20 years, you would have $381,794.
And if you’re really patient and don’t touch it for 30 years? It would grow to $840,281. And that’s assuming taxable accounts!
If you were doing this into non-taxable accounts like Roth IRA’s, then you would have over $1.3 million after 30 years! If you're interested in calculating how much you can make with index funds, then c
That’s a pretty decent chunk of change if you ask me.
What Percentage of Your Retirement Should You Have in Index Funds?
A good rule to know for how much you should have in stocks is to take your age and subtract it from 110.
For example, I’m almost 25 years old.So, 110-25 = 85%. I should have 85% of my retirement in stocks, and the rest in cash or more conservative funds.
As you grow older and closer to retirement, you’ll want to put your retirement into less volatile investments like bonds so they’ll continue to grow but with less risk.
The Bottom Line About Index Funds
Index funds are so simple to invest in yet yield such powerful enough returns that even Warren Buffett advises people to invest in them.
They will allow you to build your retirement portfolio in a way better than most mutual funds - and at a lower cost.