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.
It’s Not ‘Unreasonable’ To See Gold Prices Soar To $4000 During Bull Market
Despite gaining 35% this year, gold prices have plenty of room to run, says Michael Cuggino, the CEO of the Permanent Portfolio Family of Funds.
Cuggino says that since gold formed a triple bottom from the end of 2015 through November of 2018, it has consistently climbed higher and has really soared this year.
“Ever since then, it has been a gradual move up, then some down. It moves sometimes in big chunks, gives some back, sits around and does nothing, reacts to stimulus, inflation, the value of dollar and euro … but it has had an aggressive move this year,” Cuggino said.
Possible Setbacks Along the Way?
With gold climbing so quickly in a relatively short period of time, Cuggino warns there could be sharp pullbacks along the way. But he says the overall trend is for higher gold prices.
Cuggino says the recipe of continued money printing by the government, the dollar steadily declining and growing inflationary fears mean it would “not be an unreasonable move” to see gold prices soaring to $4,000 an ounce.
He points to a metric that compares gold prices to the closing levels for the S&P 500 index. Gold is currently trading at 0.6 times the level of the S&P 500 and it hasn’t climbed above 0.7 since 2014. But when you go back to August 2011, gold traded as high as 1.7 times the S&P 500, so there’s plenty of upside for gold prices.
Gold Still Has a Long Way to Go
Just adjusting for inflation, gold would need to climb above $2,800 per ounce to equal 1980 levels, which means this gold rally has a long way to go.
Mike Shedlock, the Mish Talk blogger and investment adviser at SitkaPacific Capital Management, thinks the fuel that could push gold to $2,800 per ounce could come from all the hedge funds that are currently on the sidelines and missed the early innings of the gold rally.
“There is ample room for Fear of Missing Out to kick in as the managed money and big spec hedge funds sat out much of the recent rally,” he writes. “And with 105,025 short contracts there is plenty of fuel for a short squeeze too.”
E.B. Tucker, director of Metalla Royalty and Streaming, believes that the current rally will continue, and he thinks gold prices could hit $2,500 by the end of the year.
“Normally I would say [the bull run is overheated] but what I’m seeing in the daily action is that gold is rising in a very measured way and is not meeting much resistance, so when that’s happening you just step out of the way and let it go, that’s what you do,” Tucker said.
Like Cuggino, Tucker says there could be pullbacks in price along the way, but he says we’re in a secular bull market like we may never see again.
“This is a secular bull market. This is a bull market in gold that you’re probably never going to see in the course of your life again.”
Nasdaq Sets A New Record, Dow Forms A ‘Golden Cross’
Since bottoming in late March, the stock market continues to set records in what seems like an almost invincible climb higher.
Nevermind that Jim Cramer said the rally is being driven by the “power of enthusiastic buyers who do not know what they’re doing” and that he can’t fathom “how stupidly bullish this market can be,” the fact is that stocks are climbing higher.
The latest evidence for a runaway stock market is that the Nasdaq Composite Index just gained 1,000 points. It happened in the shortest amount of time in the last 20 years.
It took 114 days for the index to climb from the 9,000 level to the 10,000 level. That milestone was hit on June 10 of this year.
In just 40 days since, the Nasdaq has tacked on another 1,000 points, climbing above the 11,000 level.
That is the fastest 1000-point gain for the index since it took a blistering 38 days in 1999. Back then, it climbed from the 3,000 level to the 4,000 level.
You might recall that period, it was during the dot-com bubble. We know how that ended.
Today’s 1000-point climb is only a 10% overall gain (from 10,000 to 11,000) compared to the 33% overall gain during the ‘99 surge (from 3,000 to 4,000). However, it’s still a blistering pace that investors pay attention to.
“Although 11,000 by itself doesn’t mean much, these big round numbers are a nice reminder of just how strong this rally has been since the March lows,” said Ryan Detrick, the chief investment strategist at LPL Financial.
A ‘Golden Cross’
Not wanting to miss the fun, the Dow Jones Industrial Average just flashed its own bullish signal to investors.
The index just formed a “golden cross,” where the shorter-term 50-day moving average crosses above the long-term 200-day moving average.
Investors consider this to be a bullish signal for the index, as it shows the short term momentum is strong.
Conversely, when the 50-day moving average crosses below the 200-day it’s called a “death cross” and is a bearish indicator. The last “death cross” was on March 20. On that day, the stock market was pummeled by the economic shutdown caused by the coronavirus pandemic.
With the rally being led by technology stocks, the Nasdaq – which is more than 50% tech stocks – has gained more than 60% since the March lows. The S&P 500 is made up of about 25% tech stocks and has gained nearly 50% since March, and only 20% of the Dow is tech stocks so it’s lagged behind, gaining only 47% since March.
How reliable is the “golden cross” for stocks to move higher? According to Dow Jones Market Data, the last time a “golden cross” failed was in January 2016. That was also the last time the market slipped lower.
Get In On The Hottest Investment Trend Today: SPACs
The hottest new investment trend right now are SPACs, or special purpose acquisition company. It’s how Nikola Motor Company, which plans on making both electric and hydrogen-powered trucks, went public virtually overnight.
With the IPO market cooling, it has become an appealing alternative for private companies looking for a quicker and easier path to being publicly traded.
Now billionaires are tripping over themselves to create SPACs as quickly as possible. They need to do so if they want to get in on the gold rush.
What are SPACs?
SPACs are commonly referred to as a “blank check” company and with good reason: they are created to go around gathering a bunch of money from investors with the only goal to buy an existing business within a specific time frame, usually 18 to 24 months.
The management team essentially has a blank check to go out and buy any business it sees fit. Some are created with a specific acquisition in mind. Others are created simply to have the money in place and ready to go when the opportunity arises.
The structure is very similar to private equity deals or leveraged buyouts. Also, private equity firms, hedge funds, and other “smart money” investors sponsored the creation of many SPACs.
Many of these SPACs are publicly traded. So, if the idea of having “smart money” go around hunting for the best deals on your behalf sounds appealing, you can typically invest in them through your normal brokerage account.
Here’s a short list of SPACs that you can either buy today or can buy very shortly once they go public. Be aware, many of these SPACs are just a few weeks old. So, there isn’t much history to judge their performance by.
Pershing Square Tontine Holdings (PSTH.U)
Fresh off a billion-dollar payday in March, Pershing Square Capital Management’s Bill Ackman just launched a $4 billion SPAC, the largest in history after overwhelming interest from investors.
Ackman has the right to put in another billion, giving the company access to a total of $5 billion to hunt for what Ackman calls a “unicorn” with “significant long-term growth potential that will be likely candidates for inclusion in the S&P 500 index.”
“Our thesis is by having a $5 billion cash pile in a public company; it’s our own version of a unicorn. It’s a one-of-a-kind entity,” Ackman said during an interview with Yahoo Finance. “So, we’re looking to marry a unicorn. So we’re prettying ourselves up for the most attractive possible partner.”
Churchill Capital IV (CCIV.U)
While not publicly traded yet, this will be founder Michael Klein’s fourth SPAC. Two of them have acquired companies and one has yet to find an acquisition target. To highlight investor demand for SPACs, Klein raised $1.8 billion for his fourth SPAC. This figure stands at 80% more than what he originally planned.
With his latest SPAC, Klein is looking for a company with excellent long-term growth prospects, a strong competitive advantage, recurring revenue, attractive free cash flow. He is also looking for a company that is in an industry where consolidation opportunities exist.
Dragoneer Growth Opportunities (DGNR.U)
Like Churchill Capital, this SPAC is not yet publicly traded. The company is lead by CEO Marc Stad, who appeared multiple times on Fortune magazines “40 Under 40” list. Also, other directors include David Ossip, CEO of Ceridian HCM Holding, and Sarah Frier, CEO of neighborhood social network Nextdoor.
Stad has a strong pedigree, having backed a number of very successful companies in the past, including Spotify and Uber Technologies. Dragoneer will focus on six areas: software, internet, media, consumer/retail, healthcare IT, and financial services/fintech.
East Resources Acquisition (ERESU)
Current Buffalo Bills and Buffalo Sabres owner Terry Pegula started East Resources targeting the energy industry in North America.
It makes sense given Pegula’s history, having sold his company, East Resources, to Royal Dutch Shell for $4.7 billion in 2010.
Now Pegula is back, looking for operational control of a company that has long-lived assets with low fixed costs, that is producing oil and gas and generating free cash flow, but is operating below full capabilities.
With Pegula’s extensive knowledge of the oil and gas industry, he could find multiple opportunities in a short period of time.
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