Why Boring Is Beautiful When It Comes to Your Money – Index Funds

BY: - 14 Feb '17 | Money

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Warren Buffett is the third richest man in the world and has been hailed as one of the greatest stock pickers of all time. But you might be surprised the advice he is giving to his future heirs. Instead of investing in individual stocks or mutual funds, when Buffett passes away he wants his wealth placed in index funds.

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. 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.”

Why does one of the greatest investors in the world believe that index funds are the best option for most people seeking to harness the power of the stock market?

As an investor you could purchase individual stocks. However, to pick the right stocks for your portfolio and avoid getting burned you’d have to do your research.

The stock picking pros at the highly regarded Motley Fool advise that you search for companies with a good business model and long term prospects. Make sure the company has long term growth prospects and is not overvalued. Finally, check that the company is being guided by competent and ethical leadership.

The problem is that researching all of this takes time and energy, which many of us simply do not have. Additionally, to diversify your risk, the Motley Fool experts suggest that you purchase and hold a minimum of 15 individual stocks.

Now that’s a lot of homework.

If you’re unable to put in that much effort, you can pay someone to do it for you. This is the idea behind managed mutual funds.

In a mutual fund a manager purchases a basket of stocks for the investor. The common belief is that a mutual fund manager will use his expertise to purchase the best bag of stocks for you, maximizing your returns. The truth, however, is that the numerous fees associated with actively managed mutual funds quickly devour your investment returns.

Which brings us to index funds.

Instead of trying to beat the market, which few individual investors or mutual fund managers are able to accomplish, index funds simply try to match market returns. With an index fund, you’re simply purchasing all the pieces of stock in a particular index. A S&P 500 index fund, for instance, would allow you to own a small piece of every one of the 500 largest companies in America. Because index funds are not actively managed, the costs associated with the funds are low, which helps maximize your profit.

Index funds do not carry the excitement associated with purchasing individual stocks or with dabbling with actively managed mutual funds.  But in this case, boring can be beautiful because the returns generally are very close to the returns of the market overall. The S&P 500 has conservatively, on average, managed an annualized 7% return on investment over a period of multiple decades.

Warren Buffet is so sure that index funds are the key to unlocking the power of the stock market that nearly eight years ago he placed a one million dollar bet (with the proceeds going to charity). He wagered that a S&P 500 index fund would outperform a collection of hedge funds at the end of ten years. These hedge funds are similar in many respects to mutual funds and are run by some of the smartest investors in the industry.

Eight years into the bet and Buffett’s S&P 500 index fund has enjoyed a 65.7% return on investment vs only a 21.9% return for the hedge funds.

As Buffett summed up in a 2004 meeting:

“Among the various propositions offered to you, if you invested in a very low-cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time.”

Clearly, when it comes to stocks, one of the best ways to invest is also the easiest. Simply place your money in a low-fee index fund.

BWMK: Are you invested in index funds?

About the author

Alonzo Peters wrote 285 articles on this blog.

Alonzo Peters is founder of MochaMoney.com, a personal finance website dedicated to helping Black America achieve financial independence.

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5 Things You Could be Doing with Your Money Other than Having a Pricey Wedding

BY: - 15 Feb '17 | Lifestyle

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Your wedding day is a BIG day. I get it. When I got married, over eight years ago, I wanted everything to be perfect. I dreamed about that day for years. And as someone who didn’t grow up knowing any happily married couples (and hardly any married couples to be honest), I was determined to make my wedding pretty magical.

And it was.

I don’t have a single complaint about how my wedding day transpired. Even the morning and mid-day rain turned out to be beautiful. But I do have one regret (and I don’t regret much). We spent too much money. And based on recent studies, that trend seems to be getting more and more out of hand every year. Based on The Knot 2016 Real Weddings Survey, the average couple spends $35,329 on their wedding.

And as a native New Yorker, imagine my shock when I realized that the average cost for a wedding in New York City and Long Island is $75,464. What on earth are people spending all this money on? But if NYC is too rich for your blood, you can consider moving to Utah where the average cost is $20,337. Either way, the point is that a lot of couples are spending a lot of money to make it a special day.

The new national average is up about $3,000 from the data collected on the 2015 survey. It’s a pretty significant change in just one year. And the saddest part is that this number doesn’t even include the honeymoon. The good news, though? It seems to include the cost of the engagement ring. Now that makes me feel a little bit better.

So if you are in the process of planning your wedding, you have to ask yourself if you both really want to spend an arm and a leg on your big day. Yes, it’s special and you won’t ever forget it, but you may also spend years suffering for your decision to overspend. After all, isn’t a healthy, long lasting marriage about so much more than one extravagant day?

If you are starting to feel the financial pressures that can come with wedding planning and you still have time to pivot,

Preparing to buy a house

I am sure you knew this would be the first thing on this list. Listen, owning a home with your spouse is major, and home ownership is not cheap. Not only do you need to save up for the down payment on the actual home, but you have to consider all the money you’ll spend once you’ve purchased a home. Things like repairs, new furniture, décor, and other essentials add up. It is no joke. So instead of spending a ton on one day, maybe you should consider spending that money on where you will live and develop some incredible memories as husband and wife.

Getting a new car

If you both have great cars, this may not apply. But if buying a car is somewhere in your near future, imagine what it will feel like to buy a car without having a car note (or at least a very small car note). Sure, we all talk about avoiding credit card debt, but car loan debt isn’t fun either. Avoid it if you can and cruise into your marriage with a car that’s actually all yours.

Investing in a dream you have

I am sure you both have dreams you want to accomplish. Whether it’s a business you want to start or a vacation home you’d like to build one day, I am certain your money will be better spent on a collective dream than on feeding 150 guests and overpriced invitations that will probably end up in the trash (yes, you are the only one saving the fancy invitation).

Starting a college fund for your kids

Planning on having kids? It’s never too early to save for their education. If you decide not to raise children, you can always find something else to do with the money. But if you do have kids, you will be so grateful you started saving early on.

Planning for annual vacations

Vacations are expensive. If you love to travel, you may want to create an account just for traveling. Life happens and you will find that you easily come up short when it’s time to plan that trip to Paris that you always wanted to take. The best and most enjoyable way to travel is debt-free. Do you want a lifetime of traveling and connecting with the love of your life or a big fancy party that leaves you feeling broke and wondering why you spent so much?

BMWK family, are you planning to spend a lot on your wedding day or do you have other plans in store?

About the author

Martine Foreman wrote 490 articles on this blog.

Martine Foreman is a speaker, writer, lifestyle consultant, and ACE-certified Health Coach who specializes in helping moms who want more out of life but feel overwhelmed and confused. Through her content and services, Martine is committed to helping women embrace their personal truth, gain clarity, and take action to create healthier, happier lives. For more on Martine's candid views on life and love, visit her at candidbelle.com. To work with her, visit her at martineforeman.com. Martine resides in Maryland with her husband, two kids and sassy cat Pepper.

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