You must build the mindset of an investor; it doesn’t come naturally. We have gone from broke to saving throughout the Middle-Class Investing 101 series (101, 102, 103, 104, 105, 106).
Now, it’s time to dabble in the stock market. However, we need to understand the long-term advantages and disadvantages of simplified investing using index funds.
Index funds can help us grow our wealth along with the stock market. But using index funds during retirement can present a problem if we don’t dive deeper into investing for income. Let’s begin.
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What are index funds? Index funds are a collection of stocks you can purchase under one roof. These exchange-traded funds track an index passively.
Passive index fund investing is a strong strategy for people who want to avoid following the stock market intensely.
Index funds are simple ways to capture the stock market’s daily, weekly, monthly, and yearly fluctuations. Overall, the markets tend to return 8-10% on average (over 20+ years).
Therefore, by investing in index funds, you can passively earn 8-10% in your Roth IRA, Health Saving Account, Traditional IRA, or taxable brokerage account.
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Why index funds over individual stocks? Most people should not buy individual stocks because of the time required to monitor their investments.
I love investing in blue-chip dividend-paying stocks, but I also read the news for at least one hour every day. Keeping up with your stocks can consume a lot of time.
Index funds present a convenient solution for tracking an index of stocks. An additional benefit is that you won’t get emotional with index funds.
If the stock market is up that day, your stock market index fund is up. If the market does go down, your index fund decreases. It’s super simple.
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It’s easy to become emotional when McDonald’s (MCD) has bad news about some new products. Or Starbucks (SBUX) closes some stores in Europe. Index funds prevent you from hopping on the daily news grind.
Long-term benefits of index funds. So why invest in index funds over 20-40 years? Consider index funds like building a primary residence.
The goal is to build a massive portfolio of index funds. Over time, the power of compounding will do most of the work for your nest egg.
However, your index funds will only pay you a little in the form of dividends. You’ll basically have a considerable sum of money that produces little income.
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It’s sort of like having a room full of gold bars—they are fantastic to have but only have value when you sell them.
However, there are ways to leverage index funds without selling them. You can take a loan against your portfolio.
Let’s say you have $500,000 in index funds at age 60. You can borrow $50,000 against your portfolio tax-free, but you’ll have to pay interest on the loan.
The joys of income investing. I love investing for income. I am growing an income portfolio alongside my index funds.
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I never intend to sell my index funds to produce cash flow. However, this is how people must use index funds during retirement.
I recommend learning to invest for income early in your middle-class investing career. It will take a lot of education to liquidate your index funds and convert them to income products.
Ideally, you want to allocate your portfolio to match your personality and risk tolerance. I have about 20% in index funds, 30% in dividend growth stocks, and 50% in income investing.
Somewhere in the numbers is your comfort zone. If you buy and hold, index funds are some of the safest products you can purchase on the market.
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My favorite index funds. There are tons of index funds, but a few stand out in the crowd. First, let’s review the major indexes.
- Total stock market– covers the entirety of the stock market.
- S&P 500– covers the top 500 companies in America.
- Dow Jones Industrial Average– covers 30 strong, established companies.
- Nasdaq 100– covers 100 leading technology and growth companies.
Between these four indexes, you will have exposure to growth, value, and the total market. You can find index funds that cover each of these indexes.
You can also find index funds that put different spins on each index. For example, you can find a dividend-heavy version of the S&P 500 (SCHD).
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My favorite index fund is Vanguard Total Stock Market (VTI). It simply covers the entire stock market. It’s easy for me to capture the daily motion of the market with VTI—it is my go-to index fund. Here are my four favorite index funds.
- (VTI) Total stock market- covers the entirety of the stock market.
- (SPY) S&P 500- covers the top 500 companies in America.
- (DIA) Dow Jones Industrial Average- covers 30 strong, established companies.
- (QQQ) Nasdaq 100- covers 100 leading technology and growth companies.
How to get started with index funds. We all have to start somewhere; luckily, index funds are simple to purchase.
I recommend using an app like STASH or Cash APP because they allow fractional shares and dollar-cost averaging.
You can download STASH (affiliate link) and set up a weekly $10 purchase of VTI. It’s that simple to start building wealth with index funds.
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I will use M1 Finance (affiliate link) if you want to buy all four at once. You can start a pie that has all four (or more) index funds inside.
You transfer a set amount weekly or monthly, say $100, and M1 Finance will auto-balance the portfolio to your allocation preferences.
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Conclusion. We are now getting into the meat of investing—growing our wealth. As you can see from above, keeping a long-term mindset is essential.
Yes, your index funds can suffer during market corrections and recessions. However, these are great times to buy more.
The market will eventually increase to all-time highs. It may take a few months, like the pandemic, or a few years, like the Great Financial Crisis.
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That’s why it’s a good idea to set up your automated investing program and forget about it. If you stare at your screen all day, you’ll begin to panic.
Over the long run, you’ll want to learn how to invest for income. Having a massive pile of index funds doesn’t do much to pay your bills.
Either you learn to accumulate dividends, or you will have to sell your index funds to pay for your lifestyle. Selling shares is much more stressful than buying them. I recommend investing in dividends while using index funds to build wealth. Good Luck!
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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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