What is your retirement money invested in? The safest and smartest investment is a stock index fund.
There are a lot of misunderstandings about investing in the stock market. Most are afraid and wary of this subject.
Try bringing up the subject with your spouse, or family, or friends. You’re bound to get concerned looks and questions like, “Isn’t that risky?”
They imagine trading stocks is like gambling large amounts of money at a casino. You can’t play against the smart, savvy Wall Street men – they’ll outsmart you every time!
Of course, it’s not quite like that. A stock index fund is not day trading. There’s no big, electronic screen with red and green numbers. There’s no well-dressed men sweating, picking up phones, and slamming them down.
Others are convinced they can trade stocks better than an index fund. They attempt to do research, but are unsure which stocks are best. How do you know if a company will succeed or fail? Which stocks should you buy or sell?
The answer to these fears and doubts is a stock index fund. This clever invention all but guarantees return. They have low expenses and are easy to manage.
In fact, Warren Buffett advises investing in a stock index fund:
“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund” – Warren Buffett
In this post you’ll learn what a stock index fund is, why you should invest in one, and how to get started.
Let’s dive in.
What is a Stock Index Fund?
Stock (sometimes called a share) is a piece of a company that you own. If you have stock, you have a right to a portion of future profits the company makes. You also have the right to attend shareholder meetings and vote on company decisions, though you’re not obligated to.
The profits you receive from stocks are called dividends. Theoretically, if you own stock you can make profit for the rest of your life. However, companies do poorly from time to time, and dividends fall.
Analysts and financial advisors try to predict which stocks will do well and which ones won’t. They watch the news, ready to buy Apple’s stock when they announce a new phone. They’re ready to sell when a CEO has a public scandal.
The truth is you can never tell if a stock will do well in the future or not. They are too many variables. Besides, it’s stressful and induces anxiety.
A stock index fund looks at the long term growth of the entire stock market. Instead of worrying about which stocks will do well, a stock index fund invests in all of the stocks.
This clever invention operates on the theory that the collective stock market always wins. Meaning, even if some stocks do poorly, the overall performance of the stock market nets worth.
A stock index fund mirrors market indices. Let’s explain the difference between a market index and an index fund.
A market index records data on many stocks. These indices (the plural of index) are not investing in stocks; they are recording the rise and fall of stocks.
There are many market indices, but let’s look at a famous example: The S&P 500 (Standard and Poor’s). This index tracks the top 500 companies in the United States.
Now let’s look at index funds.
Index funds base their decisions off of these market indices. A popular index fund called the Vanguard 500 Index Fund bases their decisions on the S&P 500.
The Vanguard 500 Index Fund therefore copies the S&P 500 market index.
The Vanguard 500 Index Fund automatically buy all of the stocks, in the appropriate ratios, of the companies listed in the S&P 500.
Whenever the S&P 500 adjusts their index, the Vanguard 500 Index Fund also adjusts its portfolio.
You can track the Vanguard 500 Index Fund here. Here’s a screenshot of the fund’s recent activity:
If a company drops below the top 500, the S&P 500 records that. Then the Vanguard fund sells all of that stock, and invests in the new company now in the top 500.
Obviously not every company succeeds, but the collective of companies will. So if you invest in the 500 best companies, you will eventually, always make profit.
Pretty clever right? Let’s explain some more benefits.
Why Choose a Stock Index Fund?
There’s a lot of ways to invest your money – bonds, properties, high interest savings accounts. What makes a stock index fund different from these other options?
Stock index funds are passively managed. This means there’s less of a human component in buying and selling stocks.
As explained earlier, stock index funds simply copy market indices. There’s no guesswork, no research, and no magic formula to follow. All a stock index fund has to do to buy the stocks listed on a market index.
Software can do most of this work. Therefore managing a stock index fund is very easy, and doesn’t require a lot of overhead.
As of April 2019, the Vanguard 500 Index Fund has a 0.03% expense ratio. If you invest 10,000 dollars, 3 dollars will go to overhead cost every year.
Compare this to actively managed funds, which can be as high as 1.5%.
Stock index funds also have low turnover rates. Meaning they don’t constantly trade stocks, but rather do it sparingly and rarely.
In some cases, all an index fund needs to do is rebalance their portfolio every 6 months to match its market index.
This keeps costs down tremendously, since buying and selling stocks can incur capital gains taxes. By having lower turnovers, it’s cheaper to manage a stock index fund.
Ultimately, that means it saves you more money.
Simple strategy that never changes
There are no surprises with a stock index fund. Other investments may require a change of strategy. For example, if property value goes crazy, you may be forced to sell properties you own.
Actively managed funds may change their style or philosophy over the years. Perhaps they stop investing in tech companies and start investing in oil companies.
Or perhaps your old fund manager retires and a new manager takes over.
That comes with uncertainty about the future. But this doesn’t happen with stock index funds.
The strategy is always the same – follow the market index and always adjust stocks to match the index.
This tactic remains the same for any manager, any time period, and in any situation.
You don’t have to worry about overcoming new challenges or answering future questions.
The strategy is set in stone.
I won’t pretend there aren’t safer options. Investing in government bonds is widely considered safer than what I’m recommending.
However, investing in a stock index fund is safer than a lot people imagine.
As explained earlier, certain companies may do poorly, but the collective nets profit over time.
The reason is that the top companies are always competing, adapting, and trying to succeed in their industries.
With a stock index fund such as the Vanguard 500, you’re not betting your money on a particular company, but the U.S. economy.
Experts have tested this method for forty years. As previously mentioned, this is Warren Buffett’s common suggestion when giving advice on investing.
How to Invest in a Stock Index Fund
Investing in a stock index fund begins with research. You may want to consult with your financial advisor.
Then you must choose a fund. Not everyone will select the same one.
Some index funds are based on the Dow Jones, which only tracks the 30 largest public companies.
On the other hand, you can invest in a fund that tracks the entire US stock market. An example is the Vanguard Total Stock Market Index Exchange Traded Fund (VTI).
Various funds offer different levels of exposure to risk, overhead costs, and returns. So start with research.
One option to consider is what Warren Buffett recommended – a fund that tracks the S&P 500. Earlier I mentioned one – The Vanguard 500 Index Fund.
You can learn more, and start investing, in this fund at Vanguard’s website. There is a minimum investment of 3,000 USD.
For several years, many have considered Vanguard a trusted institution.
Alternatively, you can invest in stock index funds for other countries.
Historically speaking, the United States has been one of the most business-friendly nations on the planet. So there’s wisdom to particularly investing in U.S. stock.
You can also use other companies to manage your index fund(s), such as Betterment.
Invest Well to Retire Well
Going into retirement with a chunk of money in a stock index helps tremendously.
They regularly pay dividends. You can additionally take out more money, and slowly deplete your funds.
If you calculate your money, and pace yourself, you can retire knowing you’ll have a steady supply of money.
And you won’t have to work ever again.
The Next Generation of Sin Stocks to Ride Out a Bear Market
While the recent stock market rally has technically pushed the Dow Jones Industrial Average out of a bear market, many investors aren’t convinced it will last.
They expect that once the euphoria surrounding the $2 trillion stimulus plan wears off, the market will resume its slide downward as the economic impact of the coronavirus takes hold in the next few quarters.
Sin stocks, so named because they are things that we should go without but can’t seem to part ways with, are historically a great investment during downturns.
The added stress and uncertainty means an uptick in business for the companies producing these sinful indulgences.
Things like alcohol, cigarettes, weapons and gambling all fall under the umbrella of sin stocks, so companies like Altria (NYSE:MO), Diageo (NYSE:DEO), Sturm Ruger (NYSE:RGR) and MGM Resorts (NYSE:MGM) are all widely considered to be sin stocks.
And while they can make great investments during times of uncertainty, there’s a new breed of sin stocks that could generate even larger returns over the coming months as Americans turn to their (new) favorite vices.
Here’s a short list of “next gen” sin stocks that we expect to do very well.
While this is by no means a “new” vice, it is only in the last few years that it’s been possible to directly invest in companies that produce and sell marijuana. That wasn’t possible during the 2008 financial crisis, so it will be interesting to see how the major players do during their first economic downturn.
Just like smoking, we expect demand to hold up very well, if not increase, during times of turmoil.
Consider the larger companies like Canopy Growth (NYSE:CGC), GW Pharmaceuticals (Nasdaq:GWPH) and Cronos Group (Nasdaq:CRON).
Being a “gamer” is a lifestyle now, with livestreaming on YouTube and Twitch and professional Esports leagues formed around the most popular titles like Call of Duty and Overwatch.
Video games are big money now, and the larger production studios will continue to generate massive revenues as the culture grows in the years ahead.
Look at the big studios with strong franchises like Activision Blizzard (Nasdaq:ATVI) which has the Call of Duty and Overwatch franchises and Electronic Arts (Nasdaq:EA) which has the Madden, Battlefield and FIFA franchises.
Social Media Platforms
If you have a child or grandchild under the age of 30, you are probably very aware of the effort it takes to get their attention away from their phones and all the social media apps or platforms that they are using.
Tik-Tok, Twitter, Facebook, and Instagram are all designed to keep users engaged and spending as much time as possible on their platforms. The publicly traded ones are Twitter (NYSE:TWTR) and Facebook, which also owns Instagram (Nasdaq:FB)
While there are no guarantees when it comes to investing, as the coronavirus causes more people to spend time at home, they’ll be spending more time using the products and services of these next generation sin stocks, and that should translate to more revenues and higher profits for the companies.
Bitcoin Collapse Should End Discussion About it Being ‘Digital Gold’
For as long as Bitcoin and other crypto currencies have been in existence, a constant drum beat from its evangelists was the belief that it was “digital gold.”
The claim of course was an effort to throw a halo around cryptocurrencies as a “safe haven” and a “store of value” during times of crisis or economic uncertainty.
Per the Coinbase blog (emphasis theirs):
“Gold, and bitcoin, are safe havens from fiat currency devaluation, which historically tends to be incited by surging government debt. Armed with a myriad of technological advantages, accelerating development, and maturing global market, Bitcoin is a store of value to rival gold in the digital age.”
Not only that, but the same article says that Bitcoin is in fact better than gold (emphasis mine):
“Bitcoin development is accelerating and has already proven a myriad of advantages over precious metal…”
Those advantages are essentially listed as portability, scarcity, divisibility, privacy, low transfer fees and “auditability.”
Yesterday’s market rout, with the Dow Jones Industrial Average collapsing 2,352 points to have its worst trading day since “Black Monday” in 1987, should have been the day where Bitcoin could finally live up to its promise.
All it had to do was not drop as much as the broad market and perform similar to gold, Bitcoin would have a landmark day.
Instead, it got decimated, plunging 12% to close at $5,700.
In the past five days alone it has lost more than one-third of its value.
Gold, in case you are wondering, has lost a mere 6% in the last 5 days, and during yesterday’s market rout it only lost 0.74%.
One of those two “rivals” proved to be a safe haven and a store of value during these scary times.
The other proved to be nothing more than a speculative investment, providing absolutely no store of value.
Yesterday alone, the cryptocurrency market lost $62 billion in market cap, according to CoinMarketCap.
In the past month, roughly 50% of the value of the entire cryptocurrency market has been erased.
Store of value?
Safe haven like gold?
Not even close if you ask Andrew Button at Motley Fool.
“While Bitcoin fans were caught off guard by BTC’s dramatic slide, the truth is that it wasn’t surprising at all. Put simply, apart from the scarcity, Bitcoin has nothing in common with gold. Gold is a physical asset you could trade if global financial institutions shut down; Bitcoin can’t be used without access to a computer. Gold is as old as human civilization; Bitcoin is younger than social media. Gold is used in manufacturing and jewelry; Bitcoin hasn’t seen any practical use case outside of black markets. The two assets simply have nothing in common whatsoever.”
While the siren song of “digital gold” is alluring, it’s time we stop pretending that Bitcoin has what it takes to become a real asset class. In times of uncertainty, it failed to perform as promised.
7 Blockbuster Drugs Expected To Be Launched In 2020
Biotech stocks had a fairly decent run in 2019, thanks to record deal flow, several path-breaking innovation in drug research & development and the positive broader market sentiment. New molecular entity approvals totaled 48 in 2019, less than the 59 NME approvals in 2018.
The new year is expected to be risk fraught, as lawmakers are expected to step up their rhetoric on drug pricing. Even as the outlook for drug companies remains not-so-promising, some key drug approvals could still impart some momentum to the sector.
The FDA could expedite the review of some drugs, Evaluate Pharma said, citing some approvals in 2019 that came about well ahead of the scheduled PDUFA date such as Vertex Pharmaceuticals Incorporated’s (NASDAQ: VRTX) Trikafta. Trikafta, a treatment option for cystic fibrosis, was approved five months ahead of the PDUFA date.
The following are the drugs with blockbuster potential that could make their way from lab to the shelves, according to Evaluate Pharma.
- Sponsor: Daiichi Sankyo Company, Limited (OTC: DSNKY) & AstraZeneca plc (NYSE: AZN)
- Indication: Her2 positive breast cancer
- Status: BLA accepted with priority review status in October and the PDUFA date has been fixed for second quarter of 2020
- Sponsor: Aimmune Therapeutics Inc (NASDAQ: AIMT)
- Indication: Peanut allergy
- Status: PDUFA date of January; A FDA panel, which met in September, voted 7 to 2 that the efficacy data and 8 to 1 that the safety data in conjunction with additional safeguards are adequate to support the use of Palforzia
- Sponsor: Bristol-Myers Squibb Co (NYSE: BMY) (came into the company’s stable through its Celgene buy)
- Indication: relapsing form of multiple sclerosis
- Status: The FDA accepted for review the BLA in June and has set a PDUFA date of March 25
- Sponsor: Novartis AG (NYSE: NVS)(came into the company’s stable through its Medicines Company buy)
- Indication: LDL-cholesterol lowering therapy
- Status: NDA submitted in December for use in secondary prevention patients with atherosclerotic cardiovascular disease and familial hypercholesterolemia
- Sponsor: AstraZeneca/FibroGen Inc (NASDAQ: FGEN)
- Indication: treating anemia associated with chronic kidney disease
- Status: FibroGen, AstraZeneca’s partner in developing roxadustat, said it has submitted the NDA to the FDA in late December
- Sponsor: Immunomedics, Inc. (NASDAQ: IMMU)
- Indication: treating metastatic triple-negative breast cancer
- Status: After an initial snub, the company resubmitted the BLA and the FDA accepted the application for review Dec. 26, 2019, fixing a PDUFA action date of June 2
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