How To Become A Millionaire: Index Fund Investing For Beginners

What's up you guys, it's Graham here. So let's cover one of my favorite ways to invest ever, besides real estate. I would even go so far as to say that this is the best, safest, and easiest long-term investment strategy out there for most people. Also, this is the investment strategy that requires very little work, no skill needed, and still has some of the best returns out there.

And even more surprising, what if I told you that this investment outperforms 99% of individual investors and almost 95% of hedge funds? This is something you can do with about 20 minutes of your time. Yes, I know that you know what I'm already talking about here based on the title of the video, but let's drum up a little bit of suspense because we're talking about Vanguard index funds.

So let's go over exactly what an index fund is, how it works, and how you can set this up yourself in a matter of minutes to profit long term. Maybe one day, get like Lambo rich or like yacht rich or buy private islands or whatever you want. Anyway, index funds!

But really quick, I do just want to mention that this video is not sponsored by Vanguard. I had no financial incentive if you use them or not. I don't have any affiliate links to Vanguard if you buy their funds or if you don't decide to buy their funds. I have no financial affiliation with Vanguard whatsoever. I just happen to think this is a great topic to talk about. I truly believe in this strategy long term; I do it myself.

Also, I have a lot of data and research that backs up everything that I talk about, so all I ask in return is if you guys enjoy videos and topics like this to go ahead and gently tap that like button. It helps up the channel tremendously if you do that. So it just takes one fraction of a second to go ahead and do that; that’s it! Enjoy the video.

So first of all, let's start here: what exactly is an index fund? An index fund is really just a group of investments that you could put your money into, and then you own a percentage of the entire thing. Here's an example: imagine if I owned a thousand apartment buildings and they’re each worth one thousand dollars. I go to you and I say, "I will sell you one of my buildings for $1,000." That would almost be like the equivalent of you going and buying one stock of one individual company.

But the problem here is that now you only have one apartment building or one investment. What happens if that investment doesn't do very well? Or maybe that one company you invested in has a CEO who loves to talk on Twitter, and he ends up saying some stupid stuff that gets him in trouble with the SEC, and that company doesn't do well in the short term? How do you prevent something like this?

Well, here's the solution to this: imagine in my previous example, where I gave you a scenario where instead of investing a thousand dollars and you buy one of my thousand apartment buildings, imagine if you could invest $1,000, and then you get 0.1% of everything that I own. So you're a small percentage owner in all of my apartment buildings. This way, you get an averaged return based off everything that I own.

This is basically an index fund. For example, you can own all of the top 500 publicly traded companies here in the United States for the low price of just about 260 dollars. This way, you're not just buying one stock in one company, but instead, you're buying literally all of them.

Also, with index funds, you can do this with pretty much any market out there. If you want to own a small portion of pretty much every single international stock out there, well, you can do that from the low price of just twenty-eight dollars. Or you can own a small portion of the entire US stock market for the low price of just seventy dollars. And it doesn't stop there because there are index funds for pretty much any single market out there.

Like, you want to invest in bonds? Well, here you go! Or if you want to buy a whole bunch of real estate but you don't want to get just one REIT, well, VNQ offers all of this with a whole bunch of office buildings and hotels. Your money ends up going a very long way when you start doing this.

But that then leads to the question: why exactly does this make such a good investment? And also, why haven't you already smashed that like button if you didn't do that earlier? Alright, so let's start here. The biggest advantage with index funds is that they have very low fees. That's because these indexes are very simple to put together; they're very simple to manage. There isn't much overhead, and all of those savings get passed on to you as the investor.

This is what's known as a passively managed fund. You're buying into an entire portfolio of stocks that automatically gets balanced and adjusted over time without doing any work, and paying as low as 0.03 to 0.04 percent annually to do so. This is the total opposite of what's called a mutual fund, and this is a fund that employs professional stock pickers who buy and sell stocks over time to try to beat the market average.

However, all of the additional overhead expenses associated with doing this, as well as all the fees associated with buying and selling, ultimately get passed on to you as the investor in the form of much higher fees. All of that is without the guarantee of actually beating the market in the first place.

Speaking of that, when you compare the performance between the two—both index funds and mutual funds—it’s found that only 22% of actively traded funds have actually beat the market over a ten-year period. That was it; only 22% actually achieved that result. So that means that in 78% of situations, you're better off and would have made more money just investing in an index fund over ten years.

The second advantage of doing this is that for most investors out there, they will make more money investing in an index fund than they would investing in individual stocks on their own. Several studies have shown that over 92 to 95 percent of portfolio managers could not outperform the market index over a 15-year period. And keep in mind that these are people who are the brightest in their field, who have gone to Ivy League schools with a really deep understanding of economics and finance, who do this full-time daily. Not even they can outperform just the market index.

Those figures are so, so, so much worse for the average individual investor. A big reason for that is that many investors tend to trade emotionally and panic when the market drops. Then they try to time the market or they jump into a stock as it's going up for fear of missing out. It’s because of that that usually correlates to much lower than average returns.

Also, in an interview in 2017, Warren Buffett went so far as to say that attempting to pick times to buy and sell stocks is a mistake for 99% of the population. Warren Buffett even went so far as to bet a collection of hedge fund managers $1,000,000 that they couldn't beat the market over a ten-year period and outperform an index fund—literally a standard Vanguard index fund outperforming the best hedge fund managers in the entire world for a million-dollar bet.

If the wealthiest living person right now is telling all of us to go and buy index funds, then I have a feeling that is something we should probably listen to. The third advantage of going and buying index funds is to have a huge amount of diversification.

Like, even if you have 20 individual stocks in your stock portfolio, if one of those goes down and fails, you can end up losing a lot of money. On the other hand, if you go and buy the entire S&P 500 index fund, you have 500 different stocks and different companies that weight your overall return. Even if one of those fails, it doesn't really matter because you have 499 others to boost you up.

This means that having a few individual companies go up or down in the markets in the short term won't really affect your overall return because you're betting long term that the market will rise overall as a whole. Also, doing this as an investor will give you a lot more market stability because let's be real, most people can't handle the market volatility.

As soon as they see it go down, they panic and freak out and sell it. Then they see it going back up, and they buy back in because it's going back up now and they don't want to miss all the money. They can't handle any sort of market volatility. So just by virtue of that and recognizing the human tendency that we tend to freak out over the smallest things, panic, and get emotional, an index fund would solve most of those issues.

And fourth, the reason I invest in index funds, and my only other investment besides real estate, is because it takes no time to do and it's easy. I just love the simplicity of it. I also fully acknowledge that I am NOT a stock market expert. I cannot buy and sell stocks that will consistently beat the market long term, nor do I want to spend all of that time reading stock charts, reading news, and reading earnings reports that would allow me to make those types of decisions.

Even if I took all the time to do that and dedicated myself to trading stocks and trying to beat the market, if 95% of hedge fund managers—who are the most skilled people in the world—cannot consistently beat the market long-term, what makes me think that I can? I know my limitations, and I will just work around that.

So instead, I will just invest in the entire market, sit back, relax, and focus my time on other areas that will make me even more money than I can reinvest back into the markets. I would even go so far as to say that, for most people watching, they would be best off just investing in an index fund to get the highest overall return long term.

I gotta say that by doing this, it is so much less stressful. It's literally just a buy-it-and-forget-about-it mentality. There is no panicking in the middle of the night worried about like earnings reports tomorrow. There are no worries about like SEC allegations or companies going down or profits falling.

There are no worries whatsoever for me. I just know that index funds are my second largest investment besides real estate, and I have no concern that long-term overall the market will be trending up.

Alright, so with that out of the way, what's the best way to go about doing this? And also, which are the best investments for you to buy? Now, my favorite index fund investing method is what's called the three-fund portfolio. This is also one of the most popular index fund investing strategies that, like I said earlier, beats 99% of individual investors long-term over a 10-year period.

As the name suggests, it obviously consists of three funds. Obviously, fund number one is a US stock market index fund. Number two is an international stock market index fund, and number three is a bond market index fund. And that is it! This gives you the broadest diversification at the absolute cheapest cost and is going to give you the highest returns overall from just about anything else that you can do.

Not only that, but because you're investing in multiple asset classes, you have three almost uncorrelated markets that you have your money into. This way, if something happens to one, you have two others that would balance that out.

So how easy is this then to do? Well, here are three funds that Vanguard has that would basically be the entire portfolio. First, you have US stocks, and that would be the Vanguard Total Stock Market Index Fund (VTSAX). Then you have international stocks with the Vanguard Total International Index Fund (VTIAX). And then you also have bonds: the Vanguard Total Bond Market Index Fund (VBMFX).

Now, with this, in terms of how much and which to buy, it really depends on how close you are to retirement. The general rule of thumb when it comes to this is that the further you are from retirement, the more aggressive you could be with your portfolio, which means the more stocks that you should have. Likewise, if you're closer to retirement, the less aggressive your portfolio should be; the less risk you should take, and therefore the more bonds you should have.

This means if you're anything like me, and you're in your 20s or 30s, chances are you would be fine with seventy to ninety percent in stocks and then 10 to 30% in bonds. Then just buy it and hold that for 30 to 40 years. That also gives you the best chance to recover in any sort of market drop in the short term because you know that over the long term it's going to be going up in value over time.

Also, if you're a few years away from retirement, it might be a good idea to go like 80 to 85 percent bonds, and then maybe 20 to 15% in stocks so that way you have a much safer, stable return in retirement when you need the money.

Now, when it comes to me personally, I am putting seventy percent in US stocks, 20 percent in international stocks, and then 10 percent in bonds. Then I'm planning to hold all of this and contribute to it regularly over the next 30 years without changing it up—without doing a single thing. It's just buy, hold, reinvest, hold, buy more, hold, keep holding, keep buying more, and then holding. That's it!

Like I said, for most people, this would have the highest returns of just about anything you can do yourself in the stock market long-term. Overall, on average, that means that I won't get people in the comment section being like, "Well, this is bad advice because I bought Amazon 15 years ago, and now it's worth 10 million dollars, so that's really bad advice, Graham. My stocks are up 50% this year."

I'm just saying long-term, consistently long-term—not talking about the few people who got really lucky with stocks or the 1% that was able to do this successfully long-term. I'm talking overall to the 99% of people watching this right now.

Even though real estate has been my number one investment over the last ten years, I still invest in index funds because I totally recognize the benefit, the diversification, and the stability of doing this long-term for a relatively low cost.

But then what about when it comes to market timing? Since we're nearing all-time highs again, does this mean it's a bad time to invest or is this a good time to invest? From what do I think when it comes to this, and this is probably one of the most common comments that I get anytime I talk about the stock market, and thankfully this is a relatively easy one to answer.

The truth is that no one can accurately and consistently predict what the market is going to be doing in the short term. It wasn't even two months ago that the market was crashing, the bull run was over, everyone should sell everything and hold cash, and then buy back in at the dip. Then like two months later, we've almost entirely recovered, and everyone is taking back what they said, and like oh well, no, the market isn't really crashing; it’s actually...

I never said that! With that said, there have been dozens, if not hundreds, of studies that have been done on this that proved that time in the market beats timing the market in the majority of situations. In a study done by Charles Schwab, they found that in 74% of situations, you're better off investing immediately and holding for twenty years than you aren't trying to time the lowest point of the market and then riding the wave.

No one could predict what the market is going to be in the short term, so why even try? Instead, I just invest whenever I have the money with the expectation of holding it one to two decades, and I will come out ahead.

Now in terms of actually doing this, it is really just as simple as going to Vanguard.com, opening an account, typing in your checking account information, and then you're pretty much good to go within like 20 minutes. All you need to do after that is just keep buying the same investments over and over and over again and expect to grow your wealth at the same rate as the entire stock market.

Even though I made this video specifically about Vanguard index funds, there are other brokerages out there that you can feel free to use as well. Fidelity happens to be a very good example of another company that I would love to use besides Vanguard. So the answer is no, you do not need to invest with Vanguard. But if you decide to go elsewhere, at least make sure that their fees are on par or lower than Vanguard so that way you're not leaving extra money on the table.

And that's pretty much it! That's all you have to do. It's really easy, it's really basic, it's really simple, and that strategy will be 99% of individual investors out there for a very low cost. I mean, there's really just nothing not to like about this.

So with that said, you guys, thank you so much for watching! I really appreciate it. If you guys made it to the very end and you haven't already subscribed yet, make sure to subscribe. I post three videos a week, so if you want to stay tuned with that, make sure to hit that subscribe button.

Also, feel free to add me on Instagram; I post it pretty much daily. So if you want to be a part of it there, feel free to add me there. Thank you again for watching, and until next time!