Index funds are boring and don’t take much knowledge to start investing. Nobody is going to care if you made a killing with index investing.
All that being said, index funds are absolutely vital to the health of your portfolio. It is hard to go wrong with index funds, and they can help cover some of your losses.
Today, I want to discuss my top index funds. I will cover my passive index fund strategy in the following article. I want to ensure we all understand what index funds are and how they impact our portfolios. Let’s begin.
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What are index funds? An index fund is a collection of stocks that track a particular index. An index is a collection of stocks that follow companies in a pre-arranged group.
To make this more clear. A large entity creates an index of companies. Then, multiple companies can create index funds that track this index. You should get a clearer picture as we move forward.
Why do I use index funds? Index funds are inexpensive and simple ways to gain exposure to the stock market. Some people only invest in index funds—they don’t pick individual stocks.
I, however, use index funds to cover my losses and give a growth element to my dividend growth and income portfolios. Here is a quick example of how index funds can help you achieve an excellent dividend yield and growth.
Growth/Dividend example. Let’s take VTI, an index fund that typically (on average) grows at 8% a year. We can pair it with a stock that pays an 8% dividend yield like Altria (MO). We will put $10,000 in each position.
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Over twenty years, VTI would grow to $46,700, and MO would pay you $16,000 in dividends (without reinvesting).
Basically, index funds allow you to have your cake and eat it too. You can keep your money growing while also receiving dividends to pay expenses and luxuries. I use this philosophy throughout all five of my brokerage accounts.
My Top 4 Index Funds. Now, let’s jump into my top 4 index funds. I will give a quick synopsis of the index and the index fund. Remember, various index funds align with the indexes—pick the one that suits you best.
The Total Stock Market Index Fund. The total stock market index fund tracks the entire stock market. If the market has a bad day, this fund has a bad day—the same for good days. My favorite index fund of all time is Vanguard Total Stock Market or VTI.
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I place VTI in all of my accounts because it always helps pad my numbers. When investing for income, I choose to give up growth for dividends. Therefore, VTI gives me a growth element to keep my gains positive.
The S&P 500. The Standard and Poor’s 500 tracks the 500 top US companies. Over the years, a few companies have begun to form the majority of the returns. Currently, Facebook, Amazon, Netflix, Microsoft, Apple, and Google (FANMAG) are the top positions.
We have to be careful because the same stocks that take a large portion of the S&P 500 also carry a large amount of VTI. If one company were to crumble, both indices would take similar nose dives. Plan accordingly by hedging with bonds are alternative investments.
The index fund I like to use is SDPR S&P 500 Trust ETF or SPY. There are many other S&P 500 index funds, including VOO and IVV. However, I love to use SPY.
The Dow Jones Industrial Average. The Dow Jones Industrial Average consists of only 30 companies. The companies are mostly old-school-type, including McDonald’s, Procter & Gamble, Coca-Cola, and Johnson & Johnson.
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If you have read my content before, you should know that this is my favorite index. All of these companies can make you rich over time. These are slow-moving, high-paying companies.
The index fund I use is SPDR Dow Jones Industrial Average Trust ETF or DIA. This index fund is remarkable because it pays monthly.
The NASDAQ 100. The NASDAQ 100 is the opposite of the Dow Jones Industrial Average. The NASDAQ tracks the fast-moving growth stocks on the exchanges. The Dow Jones follows what we call value stocks.
Growth and Value stocks can sometimes move in opposite directions at various times. It is good to have exposure to both of these indexes. Some companies on the NASDAQ (outside of FANMAG) are Adobe, Airbnb, Costco, Paypal, and T-Mobile.
The index fund I use is Invesco NASDAQ 100 Trust or QQQ. This fund has the lowest dividend yield of all four index funds.
Let’s get rich together. I like to put all of these indexes together in my portfolios. For the most part, a good day on the stock market is good for these index funds. However, sometimes, the market shifts between value and growth—which is when it is an excellent time to have DIA and QQQ.
If you invest in a Roth IRA, having all of these is a good idea. Over the long run, these funds should return between 6-10% annually.
Should you just invest only in index funds? If it is hard to lose with index funds, shouldn’t you invest only in them? It depends on the amount of time you have or how much you want to learn about stocks.
The problem with only investing in index funds is that you will need to learn about the stock market at some point. Say you build a portfolio of $1 million with VTI, SPY, DIA, and QQQ, and you turn 66 years old.
You draw social security, and you have a pension. However, you need to withdraw $45,000/year from your index funds to ensure a high-quality lifestyle.
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Yes, you could just grab $45,000 from your stash, but will it last your entire retirement phase? What about annual inflation, or if the market dives, how does that change your strategy?
See, I can take that $1 million and build an income portfolio that pays me $80,000/year (8% dividend yield). So, I can reinvest any extra cash flow back into my portfolio, and it will continue to grow every year, never running out. Plus, I never have to sell anything—I live on dividends.
Conclusion. So passive index investing may seem like the easy way now, but the lack of education will hurt you in the long run.
Investing in index funds is amazing because watching something grow almost always upwards is cool. There are many other index funds and ETFs you can invest in, but these are my favorites and mainstays in my portfolio.
If you want to know more about investing in the stock market, I recommend my article “Dividend Investing- Back to Basics.” You can also join my Facebook Group to track my progress as well.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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