The biggest question when it comes to investing is where to invest. After reading hundreds of books on personal finance and investing, I came up with an approach to create long-term wealth. Read further to know more.
I invest in only one fund — Vanguard Total Stock Market Index Fund (VTSAX). Period.
No individual stocks. No day-trading. No complex analysis. Just one simple strategy — buy VTSAX and just keep buying.
If you want to know more about my investment strategy, keep reading. Otherwise, buy VTSAX and just keep buying.
If you understand compounding, investing is actually pretty simple. It can be stress-free.
VTSAX is an index fund that tracks the total US stock market. I invest in VTSAX through an investment company called ‘Vanguard’.
What is an index fund?
As per Investopedia, “An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500).”
In other words, an index fund tracks an index without trying to beat the market. No one is trying to actively select the companies. If you buy S&P500, your portfolio includes the top 500 companies in the US.
Why an index fund?
Research has shown that 78% of active fund managers can’t beat their benchmark over the long term.
Include the SPIVA report.
Since it is difficult to predict which stocks will succeed in the future, the best strategy is to buy the entire market and hold.
As the overall market succeeds, you succeed. The best part is you don’t have to think about it. You don’t have to think about where to invest and when to invest.
You might be wondering “why pick all stocks instead of picking the winning stocks?”.
Because it is extremely difficult to predict which stocks will succeed in the future. The best strategy is to buy all and hold.
Here’s what Jack Bogle, the founder of Vanguard, said on beating the market:
“I’ve been in this business 61 years and I can’t do it. I’ve never met anybody who can do it. I’ve never met anybody who’s met anybody who can do it.”
— Jack Bogle
Why VTSAX?
By buying the total US stock market, you’re buying a fraction of roughly 3,700 publicly traded US companies.
VTSAX is Vanguard Total Stock Market Index Fund Admiral Shares. It is the most popular broad-based index fund with 1.2T (yes, trillion!) in assets.
History has proven that total market returns are ~10% before inflation and ~7% after inflation.
The great legendary investor also recommends investing in Vanguard low-cost index funds.
When asked about where he wants his money to be invested after his death, Warren Buffett said (in his 2013 shareholder letter):
“My advice to the trustee couldn’t be more simple: Put 10% of cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.”
— Warren Buffett
There you go. His advice is simple and straightforward.
I recommend investing in a low-cost index fund that tracks either the total US stock market or S&P 500. Automate to invest every month. Set it and forget it.
The two key elements in compounding are consistency and patience. It is more important to get consistent returns over the long term than that one-off crazy returns once in a while.
Key Takeaway:
Invest in a low-cost index fund that tracks either the S&P 500 or the total stock market. Set it and forget it.
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