The Magic of Passive Index Fund Investing 2

I invest for income. Nothing gives me more pleasure than doing the math to generate dividends from my income-investing portfolio.

However, income products usually don’t increase in value. To capture the stock market’s growth, I turn to index funds.

What are index funds? Index funds are Exchange Traded Funds (ETFs) that track a specific assortment of stocks.

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For example, there may be an index that tracks all the electric vehicle companies. A company can create an index fund that allows you to purchase the index in one security.

Why are index funds necessary? Index funds can help round out your dividend growth investing and income investing portfolios. 

I like to pair my index funds with my income investing portfolio because it gives me growth. Let’s look at a quick example.

Let’s say I have a $100,000 income investing portfolio that pays me $1,000 monthly. However, overall, it appreciates at 1% per year.

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I can add $10,000 of index funds to the portfolio to give me a boost in growth. This growth allows me to cover some uncertainty during the rising interest rate environment.

Getting started with index funds. You can put index funds in all of your portfolios. They are simple and easy to understand.

I like to invest in index funds in my Roth IRAs and my kids’ brokerage accounts. Index funds are the best securities when looking ahead to 30-50 years.

When investing in a Roth IRA, you can eventually convert your index funds into tax-free dividends. 

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The best way to purchase index funds is to dollar-cost average into your positions. I like to use accessible brokerage accounts like STASH and Cash App to purchase my funds. 

My main index funds. I have four index funds that I use across my portfolios. You can choose from hundreds of index funds and ETFs, but I like to keep it simple.

1. Vanguard Total Stock Market (VTI) tracks the total stock market index.
2. SPDR S&P 500 (SPY) tracks the S&P 500 index.
3. SPDR Dow Jones Industrial Index (DIA) tracks the Dow Jones Industrial Index.
4. Invesco Nasdaq 100 (QQQ) tracks the Nasdaq 100 Index.

These names may seem confusing, but you will eventually see these indexes everywhere. In fact, you can find these every day on the stock market tickers.

The fantastic growth index funds. You don’t buy index funds for the dividends; you purchase them for incredible growth.

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Let’s look at a quick case study of the power of compounding and time. Let’s say you invested $10,000 at your daughter’s birth.

You then added $100 a month to the portfolio until she turned 65. You are looking at $6.5 million at a 9% return.

All this by simple passive index fund investing. We must start investing in our kids’ accounts as soon as possible to capture the element of time.

Not so passive. One main problem with index funds is that they don’t generate much income. To create revenue, you will need to sell your shares.

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This problem is why I use my income investing and DGI portfolios for income. Most people go all in on index funds.

When they turn 60, they must sell their shares to generate income—creating a lot of stress and anxiety about the markets.

Be careful not to place all of your eggs into the index fund basket. I love index funds but never want to sell shares to generate income.

Dividend ETFs vs. Index funds. An excellent way to passively earn dividends is through Dividend ETFs such as Schwab Dividend ETF (SCHD).

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Dividend ETFs such as SCHD resemble the S&P 500 index fund (SPY) but with only dividend-paying stocks.

The yield on SPY is around 1.5% and roughly 3.5% on SCHD. The difference in yield can allow you to live on dividends with SCHD.

Income for the win. We all live on income; it is the lifeblood of our lives. I like to use index funds as a supplement to my income portfolios.

The general media tells you to invest in index funds as the primary source of income throughout retirement. 

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Ensure you have an income plan for retirement outside of index funds. If the market is down when you retire, you can realize massive losses in your portfolio when you sell.

Index funds for the future. The future is unknown. We don’t know if dividend-paying companies like McDonald’s (MCD) and Procter & Gamble (PG) will be around in 50 years.

Index funds make a great investment when you can’t see that far into the horizon. Therefore, they make great additions to long-term investing for young children and young adults.

Leveraging your index funds. I never want to sell my index funds; however, I can still use them to buy things.

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I can leverage money against my portfolio via low-cost loans. Instead of selling my index funds and creating a taxable event, I can borrow against them.

Let’s say I have $200,000 in my index fund portfolio. I can use a margin loan of $30,000 to buy another investment.

Since it is a secured loan, I get much better rates than an unsecured personal loan or credit card. And these loans usually don’t show up on your credit report.

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More importantly, your index funds are still growing on the stock market, and you avoid a taxable event. 

Conclusion. I love index funds because they help grow my income portfolio. Most investors cannot beat the market over 5-10 years.

Instead of trying to beat the market, capture its gains with index funds. The Total Stock Market (VTI) is my favorite index fund.

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I use it in all five of my portfolios because it has never failed me. I trust it to give me the gains I seek on the stock market.

Ensure you have an income plan outside of index funds. I never want to sell shares to generate income; I’d rather have my dividends pay me.

If you are new to investing, index funds are the perfect place to start. Once you feel comfortable, you can add a dividend ETF like SCHD to help round out your income. 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