It’s officially the season of “giving thanks!” So, at Simply Money, we want to share three things we believe you should be thankful for as an investor.
The concept of index funds
Vanguard founder John Bogle introduced the index mutual fund in 1976 – and it was a game-changer.
Before index mutual funds, the “everyday” investor basically had two ways to invest in the stock market: buy stock in individual companies or buy into an actively managed mutual fund. But, as you’ve heard us say many times on our Simply Money radio show, investing in individual stocks is risky, and it’s tough for managers of actively managed funds to outperform their benchmark index (for example, over the last 15 years, just 7.8% of actively-managed large company mutual funds beat the S&P 500).
High trading costs and fund “loads” (another word for commission) also made investing expensive. Plus, not everyone had a broker who could provide access to these kinds of investments.
Enter the index mutual fund. It essentially “democratized” investing by making it easier, less expensive, and less risky for anyone to own a piece of the American economy. Because when you buy into an index fund, you own all the stocks (or bonds) associated with that particular fund’s benchmark index, such as the S&P 500. So, while you might not own individual shares of Apple stock, you do own a slice of Apple if you own an S&P 500 index fund (along with a portion of 499 other large U.S. companies).
These days, at Simply Money Advisors, we generally prefer exchange-traded index funds over index mutual funds because they’re more transparent, cost-effective, and tax-efficient. However, the concept of an index fund had to start somewhere, and as an investor, you should be thankful it did 42 years ago.
Yes, it can be nerve-wracking when the stock market drops. But it might not be so scary if you look at it differently – such as a “sale.” A market downturn is Wall Street’s own version of Black Friday, just not as heavily advertised.
And these “sales” happen more often than you probably realize. A “correction” (defined as a drop of 10% - 20%) occurs, on average, about every 18 months; a “bear market” (a drop of 20% or more) takes place about every three-and-a-half years on average. So, contrary to the media frenzy you usually see when stocks fall, most stock declines are actually healthy, natural parts of the market cycle.
A downturn, if viewed through the lens of long-term planning, can be a strategic buying opportunity since the stock market eventually keeps climbing upwards. Just be sure to always stay true to your personalized financial plan and the investment mix that’s appropriate for your risk tolerance.
Having a financial role model
Think about your exposure to money advice growing up. Maybe your mom taught you about the power of saving money early, or your dad explained how the stock market works. Perhaps your older cousin cautioned you about taking on too much debt, or your neighbor explained the difference between a want and a need.
No matter what knowledge was passed on to you – and who it came from – be grateful. Not everyone has a financial role model in their life.
With that said, who is the financial role model for your kids? Do they have someone to look up to about money? We hope it’s you.
But if it’s not, where are they learning how to pay back student loans, use a credit card responsibly, and how to budget? Do they understand the importance of an emergency fund and the tax benefits of using a Roth IRA? Who’s reminding them to save for retirement even though it seems like lightyears away?
It’s worthwhile to talk with your kids and find out what they’ve absorbed about money so far in life – both the good and the bad. If you want to share some basics with them, our Money Advice page has podcasts, videos, articles, and blogs dedicated to making money simple.
The Simply Money Point
We hope you take a moment over the next few days to reflect on what you’re grateful for, both as an investor and in life. Our entire Simply Money family wishes you and your family and safe and happy Thanksgiving.