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In this episode of the Personal Finance Podcast, we're going to talk about reasons why index funds, and ETF investing could 10X millionaires in the coming decades.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Andrew Giancola? Longtime listeners know, one of the best ways to build wealth is to increase your income. And one way to do that is by starting a side hustle. And that's one reason why I absolutely love Whatnot. Now, my son and I, we love collecting sports cards. And we've used Whatnot to buy and sell cards. It's been a really fun way to enjoy something we love together. Now, Whatnot is a live shopping platform where people sell everything from sports cards to clothing, electronics, and collectibles. And what's really cool about it is you can turn something you're passionate about into a business. And you could do it right from your phone. You don't even need a storefront or a website. So whether you're looking to make some extra money or find great deals on your next shopping trip, check out Whatnot.
0:44 Andrew Giancola? Search Whatnot, that's W H A T N O T, in the App Store. Download and start selling right away. When I started the Personal Finance Podcast, I had no idea how big it could become. I just knew I had something I wanted to share, so I started putting it online. And looking back, I definitely wish I would have started a decade earlier. One of the horror parts about building something online, though, is making it look professional. A website used to mean hiring a developer, figuring out design, and potentially spending thousands of dollars. In fact, on my website, I spent tens of thousands of dollars. That's what impressed me when playing around with Hostinger's AI website builder.
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2:27 Andrew Giancola? What's up everybody? Welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to dive into 10 reasons index funds and ETF investing could 10x millionaires. If you guys have any questions, make sure you join the Master Money Newsletter by going to MasterMoney.co/newsletter. And don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever your favorite podcast player is. Can I thank you guys enough for those follows? And if you're getting value out of the show, consider leaving a five-star rating and review on your favorite podcast player. Doing both of those things just helps
3:09 Andrew Giancola? us spread this message that we believe anybody in this world can build wealth. So excited for you guys to be here today because we're going to be talking through these 10 reasons why I believe index funds and ETFs could 10x millionaires over the course of the next coming decades. And this is going to be something where in this episode, we're going to give you a ton of different amazing benefits of index funds, like talking about behavioral investing. We're going to be talking through a bunch of different reasons why they're tax efficient, why they're amazing for automation and dollar cost averaging, and why they're very simple for beginners. And before we dive into all this, one thing I want to note at the top of the show is if you're brand new to investing and if you've never heard of an index fund before, you are just wondering to yourself, hey, I feel like I need to be investing. I hear every single person out there telling me I
3:54 Andrew Giancola? need to invest, but I have no idea where to get started. Well, I have the solution for you because we have a free masterclass that is called Investing for Beginners. And it's going to take you step by step, teaching you exactly how to learn about investing. I'm going to talk about different accounts that you could be utilizing. I'm going to talk about different ways to invest, and I'm going to teach you step by step how you can get started investing. So if you're interested in the Investing for Beginners Masterclass, it's 100% free. It's completely free. We want to give back to you guys as much as we possibly can. That is going to be on January 28th, it's Tuesday, January 28th at 8 o'clock PM. We will have a link at the top of the show notes down below,
4:37 Andrew Giancola? or you can see the link down in the bio wherever you're watching this or listening to this so that you can check that out again. Investing for beginners, really, really excited for you guys to join that. If you've never learned how to invest, because our entire goal is to bring you as much value as possible. We want to teach as many people as possible how to invest, because it's so important for us to have financial freedom and to be able to live the life that we want. We need to know how to invest. And so I want to teach each and every single one of you how to do that. So can't wait to see you there. Now, building wealth is a simple process, yet the problem is that most people start to overcomplicate it. Maybe they heard about a stock tip from their uncle growing up. Maybe they read a few books and think they know how to invest. Maybe they watch the news and they hear all these different things about investing. Most of us overcomplicate investing.
5:21 Andrew Giancola? Last year, at the time recording this, the S and P 500 returned 25% to investors. And just learning how to invest long-term in something low cost, like an index fund or an ETF, is one of the most powerful things that you can utilize in order to build wealth. It is one of the best set it and forget it systems if you actually learn how this works. And I truly believe that as the rise of index funds continues on, we're going to have so many more millionaires in this world. In fact, I think these millionaires are going to 10x over time. Because the biggest problem for us is a lot of times we get in our own way. We try to day trade stocks. We try to figure out more complicated ways to invest instead of just looking at the entire market as a whole and investing in that market.
6:05 Andrew Giancola? Now, if you're brand new to investing, you don't even know what an index fund or an ETF is. Let me explain exactly what it is in 60 seconds to make this super, super easy for you. All an index fund is, is a basket of a bunch of different stocks composed into one thing that you can purchase. Meaning that it is just one fund that you can purchase with a bunch of different stocks in there. Typically, an index fund, the reason why it's called an index fund is it follows an index. So for example, there is something called the S and P 500. This is the 500 largest stocks in the US stock market. And this is a fantastic. Fantastic investment because it's companies like Apple, Amazon, Microsoft, Nvidia, Tesla. It's all these huge massive companies that are US-based. And so when you invest in the S and P 500 index fund,
6:50 Andrew Giancola? you are buying all of those companies at once. You get diversification, you get the highs and lows of all of those companies. If one of those companies is struggling, it gets kicked out of the S and P 500 and they add a better company in. And so index funds are an amazing way to passively invest over time. You don't have to think twice about them and instead they are something that have had amazing returns over time back to investors. Now, we talk about index funds and ETFs a lot on this show. We even have courses that teach you exactly how to invest in index funds and ETFs. Our favorite one is index fund pro. And the reason why we have those is because I strongly believe in index funds and ETFs as a long-term wealth building tool. I utilize them in all of my different accounts.
7:30 Andrew Giancola? And so today I'm going to give you the reasons why so many people are now buying index funds and ETFs and why they are accelerating their path to wealth. And in fact, there's articles now coming out saying our index funds and ETFs bubbles. And there are some interesting ideas that they continue to throw out on that. We'll have a separate episode on that, fighting back on that because it's definitely not a bubble. But these are some of the things that I want to kind of go through today. So we're going to be diving deep into some of the various attributes of index funds. So if you're ready for it, let's get into it. Number one, and one of the biggest reasons why index funds will 10x millionaires is we by nature are not good investors. And so I started off with a negative for you to understand that this is why index funds are an amazing positive.
8:13 Andrew Giancola? Most people who try to trade in the market typically will underperform something like the S and P 500. So every single professional money manager that is out there tries to outperform the S and P 500. And 90% of them year in and year out do not over outperform the S and P 500. And of the 10% that do, they are not the same year in and year out. So if you think that you can outperform an index fund when a professional money manager cannot, who has an entire team of analysts who are Harvard graduates or Yale graduates or Princeton graduates, Working for them, they have a high rise in a building. They have all the best minds in the world working on the same problem, trying to outperform the S and P 500.
8:57 Andrew Giancola? If you think that those folks cannot do that, but you can, then my friends, most of you are going to be wrong. And this is why I love investing in index funds because I myself, and you're going to hear me talk about this all the time. I myself get in my own way as an investor. And so I love passive investing. So I don't have to worry about it. You could automate your dollars into index funds. And we as humans have a bunch of different behavioral biases. One is loss aversion. So humans feel the pain of loss more intensely than the pleasure of an equivalent gain. Now, how many times have you ever invested in a stock? And all of a sudden that stock may have been reduced by 25 or 50%. Or you're invested in index fund and the market just goes down a day or two.
9:38 Andrew Giancola? When the market went down last, which was over the course of summertime in August, I had a ton of different people messaging me like, what should I do with my index funds? What do I need to do? It went down 10% in one day. You need to relax and ride this out for a little bit. And so this is something where we feel so much more pain when something goes down than when it goes up. So a lot of people sold during the 2008 financial crisis. And this is just a great example of loss aversion. Overconfidence is another one where a lot of investors believe they can outperform the market through stock picking and market timing. But every single study out there shows that this confidence rarely translates into bigger results. There's also the herd mentality that we all need to be aware of,
10:20 Andrew Giancola? which is following the crowd often leads to buying high during market booms and selling low during market panics. You can even see this for a lot of Bitcoin investors. When Bitcoin hits 100K, all of a sudden the market tries to flood into Bitcoin. When Bitcoin was at 15 or 20K, people were making fun of people investing in Bitcoin. And you can see this a bunch of various ways. The herd mentality is very, very real in this day and age because of social media and because of the mass widespread of knowledge, that you need to make sure that you are very aware that the herd mentality is out there. Okay, you need to understand that about yourself and about the humans. And there's also recency bias. So a lot of people will place too much importance on Recent events like a market dip while ignoring long-term trends during the election.
11:04 Andrew Giancola? I had a lot of people saying to me, oh, the election is going to tank the market or the election is going to make the market go crazy. And it's going to increase over time and all this stuff is going to happen. Guess what? If you're a long-term investor, these short-term things do not matter to you. In the short run, the market is a voting machine. In the long run, the market is a weighing machine. And this is one of my favorite Warren Buffett quotes because you gotta understand how the market moves. You have to have a financial education in order to do that. And so, listening to this podcast is going to be a great version for you. So, understand behavioral biases will hurt investors. We are biased as investors and we need to make sure we avoid those biases at all costs. Index funds help you do that because you're just passively investing in those index funds.
11:46 Andrew Giancola? Number two, the second reason why I believe index funds will 10x millionaires is because index funds have low fees. This is one of the most important things that you need to understand as an investor. Specifically, if you're a DYY investor or if you have yourself a financial advisor, your ears need to be perking up real high right now. So, let me help you understand something really quick. Index funds have really low expense ratios. If you find an index fund with a high expense ratio, meaning how much that fund charges you in order to be in that fund, then you need to make sure that you look for a better index fund with a lower expense ratio. If you want to learn how to evaluate index funds and what metrics you need to find, just check out Index Fund Pro. We teach you exactly how to do that.
12:29 Andrew Giancola? But if you have a low expense ratio, that 0.03 to 0.10. And when I say index funds, by the way, in this episode, it's interchangeable with ETFs. Okay, so that's just something that they are different and I will explain how they are different. But I do like index funds and ETFs. In fact, I actually prefer ETFs. So, this means for every $10,000 invested, you might pay $3 to $10 in fees based on a 0.03% expense ratio or a 0.10% expense ratio. Now, there are also index funds, like some of the fidelity funds out there, who have zero expense ratio, which are also great options to look more into. Now, if you compare this to actively managed funds. Meaning that funds that have a fund manager there that are trying to outperform
13:13 Andrew Giancola? the S and P 500, they will typically have a 0.50% expense ratio all the way up to a 1.5% expense ratio, meaning that you'll pay 50 to 150 dollars annually for every $10,000 invested. In fact, hedge funds, if you invest in one of those, often will charge 2% of assets under management and 20% of profits, making them extremely costly. And then ETFs also have very, very low expense ratios as we go through this. Now, why do index funds cost less? They cost less because they have passive management. They don't have that fund manager in place that has to do a ton of different trades all the time and have an entire team helping him analyze all these different trades. They have lower research costs because he
13:54 Andrew Giancola? doesn't need that entire team and they have fewer transactions involved, which some of them rarely trade assets whatsoever, depending on the index fund. There are some that just have, you know, 10, 20, 30, 40 really big blue chip stocks and they're rarely making trades on those funds. They incur fewer trading fees and operational expenses because of that. Third is there's a huge impact of having low fees over time that falls back to you, meaning that if you avoid these fees at all costs, you're going to have a much larger portfolio than somebody who does not avoid these fees. So for example, if you had $10,000 invested and of that $10,000, you had a 0.10% expense ratio, 10 basis points. If you had
14:38 Andrew Giancola? 10 basis points on that index fund and it got an 8% rate of return, over 30 years, it's going to be worth $67,275. Okay? If you had that same exact index fund and you had a 1% expense ratio on a mutual fund, for example, then those returns are going to be reduced over 30 years to $50,768. This is a difference of $16,507 over the course of the exact same timeframe. Fees truly matter. Imagine if every $10,000 that you had invested over time took out $16,000 from your pocket in fees. Now imagine if you broke that down into millions. Of dollars, which is what I want most of your portfolios to become from listening to this podcast.
15:23 Andrew Giancola? That is something I think that is absolutely amazing. And the amount of growth that you miss out on that, this is opportunity cost plus the cost of fees is how this is calculated. But when you look at this, this is a massive, massive difference. Fees will eat away any road at your portfolio. In fact, typically, if you have a 1% fee, it will reduce the amount in your portfolio by 20 to 30%, depending on the rate of return. 20 to 30% by having that 1% fee. This is a massive, massive thing that you need to be paying attention to. Fees will absolutely destroy your wealth long term. Now, in addition, if you have a financial advisor, you're going to have even more fees loaded on to your index funds, your ETFs.
16:05 Andrew Giancola? And so you've got to make sure that you are avoiding anything that has assets under management. I am all for having a financial planner or a financial advisor giving you advice on an hourly basis. But having them advise you and taking a piece of your investments every single year is very difficult for me to swallow. And the reason for that is because this is something that if you get somewhat of a financial education and just understand some of the basics of investing, you'll know pretty quickly that index funds reduce your costs significantly. And I've seen people who have advisors who are putting them in index funds. And so they're getting these great low cost index funds with the advisors charging them 1% to 2%. Just make sure you do your research, do your homework and look deeper into that. Also, there are hidden costs in other investments.
16:48 Andrew Giancola? There's sales loads, so some advisors or mutual funds can charge sales loads, which are like 3% to 5%. You also will see things like higher portfolio turnover, which is going to cause you to pay more taxes over time. We'll talk about turnover a little more later. And then any other advisory fees is just going to be added on to that as well. So index funds have had the major part in the fee revolution, reducing people's fees over time. Vanguard is where it started and Vanguard really talked about this in the 1970s a lot, reducing different fees. And now firms like Fidelity, Schwab, iShares, all these different companies followed suit later on to help reduce some of those fees. Now, there are real life examples of the impact on fees that we've talked about here. And so really, if You want to learn more about fees and how big of an impact they have?
17:31 Andrew Giancola? We have multiple episodes talking about this because fees are a multi-million dollar difference in your portfolio. I promise you over time, even a 1% fee, you need to understand that impact. You just heard me talk about that. If you have $5 million in a portfolio, imagine having that reduced 20 to 30%. You're losing millions of dollars just because you have a 1% fee. Now imagine if your fee was 2%, it's way more. So you need to understand the impact of fees. They will erode away at your total portfolio value. Number three is index funds have amazing tax efficiency. And this is the third reason why I believe they could help 10x millionaires over the course of the next few decades.
18:14 Andrew Giancola? So the number one reason why they are really tax efficient is they have a low portfolio turnover. So turnover is something that I always look at when I'm evaluating index funds. I want to know what the turnover is inside of that fund or that ETF. And I always go and look for that. And you really want to have a low turnover ratio of, you know, under 50% is, you know, really where you want to be. But really for most index funds, you want it under 30%. And even, you know, 1% to 10% is a great place to be. A lot of the Vanguard funds are super, super low. Actively managed funds, which you will see, are going to have turnover ratios of 50 to 100%. And that turnover ratio means that they are buying and selling a bunch of different stocks inside that fund.
18:57 Andrew Giancola? What happens when you buy or sell a stock inside of a fund? It triggers a taxable event. And so the more taxable events that are happening inside of that fund trickles down to the folks who own shares inside the fund. And so you got to make sure that fewer trades mean fewer realized capital gains. And that means less tax liability for you. You want to reduce portfolio turnover. So just remember that term. Portfolio turnover is something that you want to reduce. We talk about it a lot and it is one of the things that I love to look at when I evaluate index funds. The next reason they are great at being tax advantaged is because of tax advantage growth. So index funds by nature are not meant to be bought and sold a bunch of times. They're meant to be bought, purchased and held for the long run. And so what happens when you hold stocks longer than one year?
19:42 Andrew Giancola? You reduce your tax liability on the capital gains. Meaning that you're going to be spending less in taxes on your stocks. You're going to have long-term capital gains instead of short-term capital gains. And so by nature, index funds are made to do that. Now also, many index funds automatically reinvest dividends. And this allows you for compound growth. If you own index funds right now, I would ensure, unless you're utilizing the dividends for something, that you are reinvesting dividends. Because reinvesting dividends allows those funds to compound even faster. And so qualified dividends from index funds are often taxed at lower capital gains rate rather than ordinary income tax rate. So just making sure you reinvest those dividends is one of my favorite things to do. It's part of our investors checklist on Index Fund Pro 2.
20:27 Andrew Giancola? Is one of the things that we have you do in there. Now, another thing that you can look at is ETFs. ETFs are even more tax efficient than index funds, in fact. Now, it is a minor difference, but they actually are more tax efficient than index funds if you look at the data. And so that is something else that you can look at as well when you are making decision between index fund and ETF. ETFs honestly are just a lot easier to invest in, especially if you're a beginner. Like in our Investing For Beginners class that we're having coming up. We're going to be talking even more about that in that class. Because ETFs are very, very easy. They trade like a stock and they're very simple to get in and out of. Now, another great thing about index funds is they are available in a lot of tax advantaged accounts. So you can look at your company's 401K, for example. And typically, they're going to have target date retirement funds, target date index funds,
21:11 Andrew Giancola? and regular index funds inside of a lot of those 401Ks. So you can utilize them in tax advantaged accounts. I love to have mine in 401Ks. I put in my Roth IRAs. I even invest in them in my taxable brokerage, in my HSA. All of those locations are places that I love to invest in index funds. It is my number one thing. In fact, before we started this episode, I bought a bunch of index funds in fidelity for my kids inside of my kids' accounts. So all of these different locations are going to be a really, really great place for you as you start to invest in index funds. Let's take a break and we'll jump into number four.
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25:36 Andrew Giancola? All right, number four is that index funds help investors avoid timing the market. The number one thing that I want most of you to understand is that if you are brand new to investing, the last thing that you want to try to do is time the market, meaning that you think you know when the market is at its height, or you think you know when the market is at its low. Let me tell you something right now, and this is going to help you in your investing journey long term. Nobody in this World has a crystal ball and if they say they have a crystal ball and they know what the market is going to do. Run. You do not want to be involved with anybody who thinks that they can predict the market because typically
26:15 Andrew Giancola? those people are always wrong. And when they say they are right, it's because they predicted so many times in a row wrong. That finally they have become right once. A great example is Robert Kiyosaki. If you go look at Robert Kiyosaki, he predicts a new market movement every single day. He wrote a great book called Rich Dad Poor Dad, but outside of that, he predicts a brand new market cycle every single day and he is wrong 99% of the time. So this is something that all these predictors out there who think they have this crystal ball, who think they can predict anything in the world. It's not something you ever want to listen to. Ignore the noise. And if you're someone who takes action based on something you hear, you just can't control yourself.
26:55 Andrew Giancola? Stop watching the news. Stop listening to some of that financial data out there. Instead, just put your plan together and start to dollar cost average into some of this stuff. There was a study done by Fidelity and this is one of the best studies I have ever heard of. And they were looking at which investors had the highest return over the course of the last couple of decades. And what they found was the investors with the highest returns were those who had passed away and just left their funds invested. Because they were not interfering with compound interest. And the last thing you want to do is get involved in interfering with compound interest. Instead, what I want you to do is to choose an investment plan and stick with it long term. Now, market timing is something that I think for most people is always going to fail. One is markets are unpredictable.
27:39 Andrew Giancola? They ebb and flow in the short run. You have no idea what is going to happen. A lot of times they will drop based on political news. They will drop based on economic news. And this is something that's going to happen a lot in the short run. In the short run, the market is going to ebb and flow. It's going to go up and down. It is extremely volatile. But in the long run. The market goes in one direction. If you don't believe me, take out your phone and go to the stock market app and click on the S and P 500 and put it on the longest time horizon that it can go on your phone. Which direction does that market go? It goes up. Now, put it on a one week time horizon and you will see it fluctuating a number of different times. You want to be a long-term investor so you can take advantage of that long-term direction, which is up.
28:20 Andrew Giancola? Now, sure, anything could happen, the market could go down, but over the course of history, it has gone in one direction and that's all we have to go on. A study by JP Morgan showed that missing the 10 best days in the market over a 20-year period could reduce returns by 50% or more. So just 10 days in the market, if you miss the 10 best days, you could lose out on your portfolio by 50%. This is why we stay invested for the long run and index funds help promote that. We want to stay invested over the course of the long term. They also promote long-term thinking by having a set it and forget it approach. So the big thing about index funds, and if you've ever read the book called The Simple Path to Wealth, the thought process there is, hey, we want to set it and forget it. So we want to set this index fund up.
29:03 Andrew Giancola? We want to automatically be investing in that index fund every week or every month or whatever the frequency is, and then we want to make sure that we have that set up for the long term. This is going to allow you to automatically invest without having to lift a finger. And so this is a very, very powerful way to grow your wealth over time. I just talked about this on a recent episode, but over the course of the last year, I had an automation set up into an index fund in a taxable brokerage account that I completely forgot about. And it was a thousand dollars every single month. And over the course of the year, I invested an extra $12,000 just because I left this automation on. So you know, your boy left it going for this year as well. I'm going to keep that thing rolling, but it's just a great way if you automate your money into index funds to allow your wealth to grow over time.
29:48 Andrew Giancola? Now, I want you to look at a couple of examples here. In 2008, in the financial crisis, if you were invested in index funds and then the financial crisis happened and most investors lost about 50% or more of their portfolio during the Great Recession. Now, what did a lot of investors do? A lot of investors panicked and they They sold their investments. But if you go look from 2008 to today, if you would have just stayed invested and rode out that wave, exactly what would have happened, you would be a lot better off today than you would have if you would have sold those investments. Now let's look at COVID-19 and go look at the pandemic in 2020. What happened during that time? We had a bunch of different pullbacks. We had a bunch of little, what they call mini recessions. There was a bunch of different things that happened during the course of that year because people were panicking.
30:33 Andrew Giancola? And if you sold during that time, you would have missed out on four amazing years of gains. I mean, the S and P 500, just over the course of the last couple of years is up over 50%. And you're just losing out on some of this stuff because you are reacting to the market instead of just being a long-term investor and continuously adding money every single month and staying consistent over the long run. It's a discipline that if you actually put those dollars in and automate them and just not worry about it going forward, that is the way that I invest and it is an amazing way to really get your dollars moving. So Dalbar did a study and over a 20-year period, they did data on market timing versus staying invested. The average equity fund investor earned an annual return of just 7%.
31:18 Andrew Giancola? But those who were invested in the S and P 500 had a 10.65% return, which that is a massive difference over the course of the long-term investing. And poor timing decisions were the major factor in this underperformance. Now, I talked about the 10 best days. If you missed the 10 best days, that you would lose out on 50% of your portfolio over the course of a timeframe. Over the course of the last 20 years, if you missed the 20 best days, your portfolio would be reduced by 70%. If that's not an indicator that tells you, I need to stay invested, I don't know what is, because you need to keep your dollars invested. Don't jump in, don't jump out, just continue to dollar-cost average, which is my next point.
32:03 Andrew Giancola? And the reason why I think index funds can tenex millionaires, because they are meant to dollar-cost average. Now, there's a bunch of different terms for dollar-cost average. What I mean is you take a portion of your paycheck every single month and you put it into Investments. Now you can do this with your 401k, you can do this with your Roth IRA, you can do this with a standard brokerage account, but just dollar cost averaging into these funds is really how they were meant to be invested in. And so for most people, this is going to be the best way to grow your wealth over time. Now, we have a thing that if you go to mastermoney.co/resources, it's called the Wealth Builders Matrix. And what the Wealth Builders Matrix is going to do is it's going to take your age and it's going to take what you think your average rate of return is going to be, and it's going to tell you every single dollar that you invest,
32:47 Andrew Giancola? how much will that be worth by the time you turn age 65? And it is absolutely amazing how much wealth building capabilities we have at various ages. People in their teens, every dollar they invest is going to be worth, you know, 50, 60, 70, $80. People in their twenties, same thing. It's going to be 50, 60, 70, $80. You pull up that Wealth Builders Matrix and it is so incredibly motivating to see what can happen there. And so for a lot of folks out there who are looking to build wealth and you want to know, hey, how much is this dollar going to be worth? Go check out that Wealth Builders Matrix. It's a free resource that you can check out. It's one of my favorite things to look at every year for motivation as well. Now, why are index funds ideal for dollar cost averaging? Number one is they're super simple. Two, they have really low costs, so you can automate into them with very low costs
33:32 Andrew Giancola? and not having to worry about that. You can automate into them in your 401k and your retirement account. So it's very simple to go and do that, and they have very broad diversification. Number six is index funds are really simple for new investors to learn and understand. So I believe that index funds are some of the easier concepts to understand. Here's a great example. A lot of new investors will come to me and say, hey, should I start trading options? Well, if you start trading options, you're going to have a really complicated situation on your hands pretty quickly. There's a very high learning curve to learning how to trade options. Secondly, you're going to have a bunch of tax events. There's going to be a bunch of different negatives for a brand new investor. Or they'll come up to me and say, hey, should I start day trading? And for anybody who asks me that, I always say no. But it's just going to be one of those things that is very difficult to learn,
34:16 Andrew Giancola? even if you want to get good at that thing. Whereas index funds are very simple to understand. You understand that you're buying a basket of stocks, and if you buy the S and P 500 or something along Along those lines, you are buying the 500 largest companies in the US stock market. And so if you believe in Amazon, if you believe in Nvidia, if you believe in Apple, if you believe in Microsoft, if you believe in Tesla, if you believe in health insurance companies, if you believe in Target or Home Depot, all of these giant companies are all within the S and P 500. And so when we look at those companies and you look at the top 10, which has the highest weight in the S and P 500, you're going to say to yourself, well, these are the companies that run the world. Why would I not want to be invested in those? And if any of these companies fail or they underperform, they're just going to replace it with another massive company that runs the world. And so they just constantly cycle these companies in when some underperform.
35:01 Andrew Giancola? Because companies are going to change over the course of the next 30 years. And the top 10 in the S and P 500 will not be even remotely the same as it is right now. And so you want to understand that staying invested in that means that you're still invested in the largest companies in the US economy. The same goes if you want to invest in an international fund. It takes all the biggest international companies out there. Or if you want to go invest in a technology index fund or ETF. It has all the biggest technology companies in there or an AI ETF. If you're interested in artificial intelligence. So there's so many different things that you can do there. And it is amazing how simple it can be for investors. There's also a low learning curve. Like you could take something like index fund pro and have a great understanding of index funds very, very quickly.
35:42 Andrew Giancola? The learning curve is very low as compared to a bunch of other different strategies. But one of the things I love about this is it's automatic diversification. So diversification is a very important thing that investors need to understand. You need to be well diversified when you are investing your dollars. Why? Because it spreads out your risk. If you just invested in one company and that company went under, well, all of your net worth is also going to go down the drain. If you're invested in 500 different companies or a thousand different companies and one company goes under, you're not even going to feel the difference because you are diversified. And so making sure you have a larger basket of stocks is going to be very important. Even if you talk to individual stock investors, they're going to tell you to be very well diversified.
36:25 Andrew Giancola? The only exception to that is if you're like Warren Buffett or Charlie Munger or Monesh Prabha, or you're one of the best investors in the world and you understand what to do. You can have a lower volume of diversification. But for everybody else out here, unless you're going to do this, read 500 pages a day and you're going to make this your full-time job and you have a team of analysts out there. You do not need to be holding three, four or five stocks. You need to have more of a diversification. So that you can spread out your risk. It is very, very important for new investors to have that diversification. Index funds are also very transparent. You can look at the exact things that are inside of each and every single one of those index funds. You can look it all up when you're doing your research and understand what you are investing in and they have a very predictable strategy.
37:07 Andrew Giancola? All index funds do is they mirror that specific index. That's their entire job is to mirror an index. They just follow that index. Exactly. And so that's the entire strategy of them. And then they have that low maintenance that set it and forget it. And it's perfect for automatic investing, which we will talk about even more later. Number seven reason is if you look at who endorses index funds, it is widely endorsed by experts. Number one is it's endorsed by Warren Buffett. If you don't know who Warren Buffett is, he is the most successful investor of all time. I am a fanboy of Warren Buffett. If you've been listening to this podcast for a very long time, I have been following him. Since I read his first book at the age of 14 or 15 and he is just a wealth of knowledge, one of the wisest people to probably ever live.
37:51 Andrew Giancola? And it's just absolutely amazing how much information he can give you about investing. In his 2013 letter to shareholders, and these are one of my favorite things to read every year. If you've never read Warren Buffett's letter to shareholders. If you read through all of those and you can even skim through them every single year, there's amazing, amazing investing knowledge. We need to do an episode every year where we cover the letters, but in his 2013 letter to his Berkshire Hathaway shareholders, which Berkshire Hathaway, by the way, is in the top 10 of the S and P 500. He revealed that his instructions for his wife's inheritance included investing in 90% of the S and P 500 index fund and 10% in government. Bonds. And here's a quote from him, "A low-cost index fund is the most sensible equity investment for the great majority of investors."
38:35 Andrew Giancola? And he argues that most investors, including professionals, struggle to outperform the market, making index funds the smarter choice. Now Warren Buffett did this thing where he actually did a million. Million dollar bet with a professional money manager saying, hey, I'm going to buy index funds and you go out and try to beat the S and P 500 and let's see who wins. And they did a million dollar bet. I think the money went to charity at the end and Warren Buffett just blew this professional money manager out of the water. And this was a 10 year bet and it just absolutely, at the beginning, the professional money manager did well. And so the first three, four, five years, he was winning. But by the end of it, Warren Buffett blew him out of the water. It's absolutely amazing, the long-term wealth building ability of index funds. Now, another great person is Jack Bogle, and he is the father of index funds, founder of Vanguard,
39:20 Andrew Giancola? and he is one of probably the original people to really make a big push on index funds. And this is one of my favorite quotes from him. A lot of stock pickers, you know, look for needles in the haystack. What he says is, don't look for the needle in the haystack, just buy the haystack, which is the basket of stocks that you can buy within an index fund. He revolutionized investing. He's the one that revolutionized reducing fees, and it is one of the best things that I think I have ever seen out there. There are a ton of studies out there just showing the power of index funds, including Dalbar studies. There's Vanguard, Fidelity and Schwab have major index funds reports. And there is just a consistent outperformance of actively managed funds with fund managers. If you want to pay a fund manager's salary and you want to pay his entire team's
40:03 Andrew Giancola? salary, more power to you. You can pay more in fees based on investing in those funds. But over the long run, you just got to make sure that you understand the impact there. Now, there are even major institutions out there who are investing in the index funds, like teacher pensions, firefighter pensions, and many other institutional investors diversify into index funds because they are so predictable for a lot of people. And they have proven long-term results, which we are going to talk about next. So here's the amazing thing about historical data with index funds. So if you go look at something like the return to the S and P 500 over the course of the last 20 years, it has been 10.47%. Now, if you look at it over the course of the last 10 years, it's 13.3%. If you look at it over the course of the last 30 years, the S and P 500
40:47 Andrew Giancola? has returned 10.98%, which is absolutely amazing. And here's something to note, is every single time
40:55 Andrew Giancola? We talk about a 10% rate of return with the S and P 500. We get comments coming back just screaming at us on Tik Tok or Instagram or wherever else. But all we can go off of is the historical return of what these index funds have shown. Now, I like to be conservative. When you are planning out your retirement, I like you to be very conservative. In fact, a lot of times the models I will run is at a 7% rate of return. Why? Because obviously historical performance is not indicative of future results. We can say that over and over again till our face turns blue. But the historical data of index funds thus far is very, very promising. In fact, if you go back to 1928, it is 10.13%. So we are almost 100 years of data of 10% rate of return over the course of that timeframe.
41:40 Andrew Giancola? And so it is just amazing, amazing what you can do within the next fund over that time. Now, anything can happen in the future. I am not saying that this is going to go up forever and it is just the only thing that's going to go up in one direction. Anything could happen, like literally you could have a catastrophic event, you could have wars, you could have all kinds of stuff that could impact the rate of return. But we have no idea what's going to happen in the future. All we have to go off is these historical data. And so it's really important for us to study some of that historical data. Why? Because we just want to have an understanding of the way that some of this stuff moves. A great example is I have studied 2008 for years now. I had just started college. I was a freshman in college when 2008 happened and the Great Recession happened. And so for me, I remember that happening, but I was in a bubble in college.
42:25 Andrew Giancola? And so I knew people were struggling out there. I understood all the different things that were happening. But at the same time, I have studied what happened, how investors reacted, how investors behaved. Because if that ever happens again in our lifetime, I want to know that I am comfortable staying invested over the course of the long run. You want to make sure that you study historical data because it's going to bring you comfort when the market does take a dip in the future. And having a financial education, that makes it very, very important to be able to do that. Number nine is index funds are incredibly easy to automate. Now, I cannot tell you how much this has advanced over the course of the last 10 years. Whereas now, You can automate your money into a retirement account and you can automatically invest in
43:09 Andrew Giancola? that investment on a weekly basis, on a bi-weekly basis, on a monthly basis, on a quarterly basis, whatever frequency you want to do. Index funds will allow you to do that, specifically index funds or ETFs. So for example, today I set up some new investments for my daughter's brokerage account. And so one thing I did was I made sure to automatically invest every single month into one of my favorite ETFs, which is VOO, and that's the Vanguard S&P 500 ETF. And so I'm automatically investing into her accounts every single month into VOO, not just contributing money, but also automatically buying VOO. And so you can do that, and it's an amazing way to really grow your wealth over time. I think it is one of the most powerful things that you can do is
43:52 Andrew Giancola? automating your money. And the more you automate your dollars, the less you have to rely on your willpower. Our willpower will get in the way if we do not automate our money. And it's going to be the thing that really, really can hurt us. And so we want to make sure that we just automate our investments as much as we possibly can, so that we can grow our wealth over the long run. Now, number 10 is that index funds are available on pretty much all platforms. Any brokerage that you go look at, you can find an index fund or an ETF, and really ETFs are available everywhere. But you can find an ETF on all platforms. And this is going to be something that is just much easier for folks to be able to get invested in some of these. Whether you go from Vanguard, or Fidelity, or Charles Schwab, you're going to be able to find some great, great funds or ETFs
44:37 Andrew Giancola? out there that will fit whatever your criteria is. In addition, index funds allow you to have a very simple investing plan. This is the bonus that I want to give you guys today. You can literally write down an investing plan for an index fund on probably one sheet of paper, where it's going to be very simple. There's not all these complex terms and jargon. Instead, it is easy to understand, and it is easy to set up a plan for there. You could do a one-fund portfolio, you could do a two-fund portfolio, you could do a three-fund portfolio, but it is one of the best ways to get started as an investor. Again, if you guys are interested in You've never started investing yet. Make sure you join our Investing for Beginners webinar. That's going to be on the 28th of January. Really excited to have you all there.
45:21 Andrew Giancola? And if you want to learn more about index funds, we have a course called Index Fund Pro. You just go to mastermoney.co/indexfundpro. You can also just Google Index Fund Pro and it'll come up. And that teaches you exactly, step by step, how to invest in index funds and ETFs. Listen, thank you guys so much for being here. I truly appreciate each and every single one of you. And we will see you on the next episode.
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