Who invented the index fund? A brief (true) history of index funds

Pop quiz! If I asked you, “Who invented the index fund?” what would your answer be? I’ll bet most of you don’t know and don’t care. But those who do care would probably answer, “John Bogle, founder of The Vanguard Group.” And that’s what I would have answered too until a few weeks ago.

But, it turns out, this answer is false.

Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the “common sense” investment answer for the average person. For this, he deserves much praise.

But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!

John Bogle did not invent index funds

Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a “secret history” of which I’d been completely unaware.

In this article, I’ve done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I’m sure I’ve made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)

Here then, is a brief history of index funds.

What are index funds? An index fund is a low-cost, low-maintenance mutual fund designed to follow the price fluctuations of a stock-market index, such as the S&P 500. They’re an excellent choice for the average investor.

The Case for an Unmanaged Investment Company

In the January 1960 issue of the Financial Analysts Journal, Edward Renshaw and Paul Feldstein published an article entitled, “The Case for an Unmanaged Investment Company.”

The case for an unmanaged investment company

Here’s how the paper began:

“The problem of choice and supervision which originally created a need for investment companies has so mushroomed these institutions that today a case can be made for creating a new investment institution, what we have chosen to call an “unmanaged investment company” — in other words a company dedicated to the task of following a representative average.”

The fundamental problem facing individual investors in 1960 was that there were too many mutual-fund companies: over 250 of them. “Given so much choice,” the authors wrote, “it does not seem likely that the inexperienced investor or the person who lacks time and information to supervise his own portfolio will be any better able to choose a better than average portfolio of investment company stocks.”

Mutual funds (or “investment companies”) were created to make things easier for average people like you and me. They provided easy diversification, simplifying the entire investment process. Individual investors no longer had to build a portfolio of stocks. They could buy mutual fund shares instead, and the mutual-fund manager would take care of everything else. So convenient!

But with 250 funds to choose from in 1960, the paradox of choice was rearing its head once more. How could the average person know which fund to buy?

When this paper was published in 1960, there were approximately 250 mutual funds for investors to choose from. Today, there are nearly 10,000.

The solution suggested in this paper was an “unmanaged investment company”, one that didn’t try to beat the market but only tried to match it. “While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average,” the authors wrote, “it would also mean tha the investor would be assured of never doing significantly worse.”

The paper also pointed out that an unmanaged fund would offer other benefits, including lower costs and psychological comfort.

The authors’ conclusion will sound familiar to anyone who has ever read an article or book praising the virtues of index funds.

“The evidence presented in this paper supports the view that the average investors in investment companies would be better off if a representative market average were followed. The perplexing question that must be raised is why has the unmanaged investment company not come into being?”

The Case for Mutual Fund Management

With the benefit of hindsight, we know that Renshaw and Feldstein were prescient. They were on to something. At the time, though, their idea seemed far-fetched. Rebuttals weren’t long in coming.

The May 1960 issue of the Financial Analysts Journal included a counter-point from John B. Armstrong, “the pen-name of a man who has spent many years in the security field and in the study and analysis of mutual funds.” Armstrong’s article — entitled “The Case for Mutual Fund Management” argued vehemently against the notion of unmanaged investment companies.

The case for mutual fund management

“Market averages can be a dangerous instrument for evaluating investment management results,” Armstrong wrote.

What’s more, he said, even if we were to grant the premise of the earlier paper — which he wasn’t prepared to do — “this argument appears to be fallacious on practical grounds.” The bookkeeping and logistics for maintaining an unmanaged mutual fund would be a nightmare. The costs would be high. And besides, the technology (in 1960) to run such a fund didn’t exist.

And besides, Armstrong said, “the idea of an ‘unmanaged fund’ has been tried before, and found unsuccessful.” In the early 1930s, a type of proto-index fund was popular for a short time (accounting for 80% of all mutual fund investments in 1931!) before being abandoned as “undesirable”.

“The careful and prudent Financial Analyst, moreover, realizes full well that investing is an art — not a science,” Armstrong concluded. For this reason — and many others — individual investors should be confident to buy into managed mutual funds.

So, just who was the author of this piece? Who was John B. Armstrong? His real name was John Bogle, and he was an assistant manager for Wellington Management Company. Bogle’s article was nominated for industry awards in 1960. People loved it.

The Secret History of Index Funds

Bogle may not have liked the idea of unmanaged investment companies, but other people did. A handful of visionaries saw the promise — but they couldn’t see how to put that promise into action. In his Investment News article about the secret history of index mutual funds, Stephen Mihm describes how the dream of an unmanaged fund became reality.

In 1964, mechanical engineer John Andrew McQuown took a job with Wells Fargo heading up the “Investment Decision Making Project”, an attempt to apply scientific principles to investing. (Remember: Just four years earlier, Bogle had written that “investing is an art — not a science”.) McQuown and his team — which included a slew of folks now famous in investing circles — spent years trying to puzzle out the science of investing. But they kept reaching dead ends.

After six years of work, the team’s biggest insight was this: Not a single professional portfolio manager could consistently beat the S&P 500.

Mihm writes:

As Mr. McQuown’s team hammered out ways of tracking the index without incurring heavy fees, another University of Chicago professor, Keith Shwayder, approached the team at Wells Fargo in the hopes they could create a portfolio that tracked the entire market. This wasn’t academic: Mr. Shwayder was part of the family that owned Samsonite Luggage, and he wanted to put $6 million of the company’s pension assets in a new index fund.

This was 1971. At first, the team at Wells Fargo crafted a fund that tracked all stocks traded on the New York Stock Exchange. This proved impractical — “a nightmare,” one team member later recalled — and eventually they created a fund that simply tracked the Standard & Poor’s 500. Two other institutional index funds popped up around this time: Batterymarch Financial Management; American National Bank. These other companies helped promote the idea of sampling: holding a selection of representative stocks in a particular index rather than every single stock.

Much to the surprise and dismay of skeptics, these early index funds worked. They did what they were designed to do. Big institutional investors such as Ford, Exxon, and AT&T began shifting pension money to index funds. But despite their promise, these new funds remained inaccessible to the average investor.

In the meantime, John Bogle had become even more enmeshed in the world of active fund management.

In a Forbes article about John Bogle’s epiphany, Rick Ferri writes that during the 1960s, Bogle bought into Go-Go investing, the aggressive pursuit of outsized gains. Eventually, he was promoted to CEO of Wellington Management as he led the company’s quest to make money through active trading.

The boom years soon passed, however, and the market sank into recession. Bogle lost his power and his position. He convinced Wellington Management to form a new company — The Vanguard Group — to handle day-to-day administrative tasks for the larger firm. In the beginning, Vanguard was explicitly not allowed to get into the mutual fund game.

About this time, Bogle dug deeper into unmanaged funds. He started to question his assumptions about the value of active management.

During the fifteen years since he’d argued “the case for mutual fund management”, Bogle had been an ardent, active fund manager. But in the mid-1970s, as he started Vanguard, he was analyzing mutual fund performance, and he came to the realization that “active funds underperformed the S&P 500 index on an average pre-tax margin by 1.5 percent. He also found that this shortfall was virtually identical to the costs incurred by fund investors during that period.”

This was Bogle’s a-ha moment.

Although Vanguard wasn’t allowed to manage its own mutual fund, Bogle found a loophole. He convinced the Wellington board to allow him to create an index fund, one that would be managed by an outside group of firms. On 31 December 1975, paperwork was filed with the S.E.C. to create the Vanguard First Index Investment Trust. Eight months later, on 31 August 1976, the world’s first public index fund was launched.

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Bogle’s Folly

At the time, most investment professionals believed index funds were a foolish mistake. In fact, the First Index Investment Trust was derisively called “Bogle’s folly”. Nearly fifty years of history have proven otherwise. Warren Buffett – perhaps the world’s greatest investor – once said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”

In reality, Bogle’s folly was ignoring the idea of index funds — even arguing against the idea — for fifteen years. (In another article for Forbes, Rick Ferri interviewed Bogle about what he was thinking back then.)

Now, it’s perfectly possible that this “secret history” isn’t so secret, that it’s well-known among educated investors. Perhaps I’ve simply been blind to this info. It’s certainly true that I haven’t read any of Bogle’s books, so maybe he wrote about this and I simply missed it. But I don’t think so.

I do know this, however: On blogs and in the mass media, Bogle is usually touted as the “inventor” of index funds, and that simply isn’t true. That’s too bad. I think the facts — “Bogle opposed index funds, then became their greatest champion” — are more compelling than the apocryphal stories we keep parroting.

Note: I don’t doubt that I have some errors in this piece — and that I’ve left things out. If you have corrections, please let me know so that I can revise the article accordingly.

Source: getrichslowly.org

Alternative Investments Are Not Just for the Wealthy

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We hear a lot these days about alternative investments. Wall Street firms regularly tout their expertise in these investments and try to convince us we need them in our portfolio.

In the beginning, alternative investments were only available to what most would consider the wealthy.

The SEC set the definition of the wealthy with their accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years. Additionally, the rule states the investor expects that income to continue going forward.

If they don’t meet the income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.

One thing common in the early days of these investments was high fees. In the beginning, managers charged investors 2% of the amount invested plus 20% of profits. Here’s what that means.

In This Article

The High Cost of Fees

If someone invested $100,000 in a fund, and the fund earned 10% (few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you walked away with $6,000! Instead of a 10% return, you earned 6%! That’s a 40% drop in your profit!

Also, your money was not available to you until the project or fund sold or closed. That typically is five years or more.

Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.

In today’s post, we’re going to introduce you to six investments you may not have considered – three for accredited investors, three for everyone else. We think by the end of this post, you’ll feel more comfortable and confident in looking at these investments for your portfolio.

What Are Alternative Investments?

Let’s start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.

When investing in index funds, investors put their money in funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes.

Rather than trying to beat the market, investors take what the market offers. It’s a very inexpensive and easy way to invest.

Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets. They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.

Many of you have heard these names thrown in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.

Crowdfunding – The Game Changer

For the reasons mentioned above, innovation entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.

Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.

We’ll offer a couple of specific funds to consider shortly.

Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.

Alternative Investments for Everyone

We want to highlight three investments available to non-accredited investors. One, Vinovest, is a unique offering. The other two, DiversyFund and Fundrise, are crowdfunded real estate funds as described in the last section.

Let’s dive into the summaries.

Vinovest

Vinovest offers a unique alternative investment in assets; one would normally not consider an investment class. We’re talking about fine wine. You can read our review of Vinovest for a more detailed description.

The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of experts, called sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That’s the highest degree of recognition in the wine industry. These folks know their wine.

Wine selections come from their knowledge and a sophisticated algorithm their technical team developed — the result – the best wines with the best chance or price appreciation. You own the individual bottles. Vinovest will store and age the wine at their state of the art facilities around the world. They guarantee the safety of your wine.

The minimum investment is just $5,000. It’s a unique offering and worthy of consideration.

Fundrise and DiversyFund

Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees. The introduction of crowdfunding was disruptive. In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed.

Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.

Here’s a summary of each. You’ll find a link to our review of both for reference.

Fundrise

Fundrise has invested over $2.5 billion to date and has a history of above-average returns. They offer three core plans to get you started – Supplemental Income, Balanced Investing, and Growth. Each name describes the goals of the fund. If you’re looking for income, consider the Supplemental Income fund.

If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.

You can get more details and learn more about REITS and crowdfunded real estate in this review.

DiversyFund

Contrary to Fundrise, DiversyFund is a reasonably new entrant in the field of crowdfunded real estate investing. Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors’ capital. They have a value add investment strategy when looking for properties.

What that means is they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods. The value add in their property selection comes from finding properties that need some work. We’re not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.

With the improvements, they can charge more rent when the leases expire, and new tenants come on board. Get additional details from this review.

Alternative Investments for Accredited Investors

What follows are three recommendations for those of you who meet the criteria of the accredited investor. What follows are offerings that have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.

FarmTogether

Have you ever thought about investing in farmland? Did you not pursue that thought because you didn’t know you had enough money or didn’t know enough about it? If either of those describes you, you’re going to want to learn about FarmTogether.

FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments. Why? For one thing, we’re not making any more of it. The law of supply and demand means it’s likely to appreciate.

For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.

Here’s a look at their current offering:

alternative investment offering details from FarmTogether

You can read our full review here.

Yield Street

YieldStreet is a fixed income alternative investment. The team focuses on investments in litigation finance, real estate, consumer and commercial financing, to name a few. Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want. Below are some of the details and history.

YieldStreet alternative investment stats

They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.

You can read our review of YieldStreet here.

PeerStreet

PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invest in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans. Here’s a picture of their loans.

Snapshot of PeerStreet loan history

The returns for loan investments are above average. The LTV (loan to value) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.

Be sure to check out our review of PeerStreet to learn more.

Finding Other Alternative Investments

When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered. What is MoneyMade?

From our review – “It’s a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.” And it’s super simple to use. Just enter the criteria of the investment you’re looking for and let MoneyMade do the rest. Take a look at a search for Startups on MoneyMade below.

MoneyMade: Discover | Startups

Read our review of MoneyMade to learn more and take advantage of this great new platform.

Final Thoughts

I hope by now, you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That’s not so good for the Wall Street product producers. But it’s great for consumers.

The six investments we highlight are, by no means, meant to be the cure-all be all for alternative investments though we do think that Vinovest and FarmTogether are two of the more unique offerings available.

Before doing any investing, you should know why you’re investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals. If you don’t know where to start, a great place would be MoneyMade. If you feel like you need help deciding, consider hiring an independent financial advisor.

Whether you’re a seasoned investor of a DIYer who is looking for alternatives to the traditional stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you’re looking for.

Good luck!

Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.

I April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.

Source: debtdiscipline.com

How to Invest in Gold as a Beginner

Gold is one of the oldest investment strategies there is and continues to be relevant even today. Gold tends to move in the opposite direction as the stock market, so it can be a worthwhile asset in the event of a market downturn.

gold on table

When you imagine investing in gold, you may picture people hiding gold bars underneath their bed. This is an option, but it’s probably not the smartest investment strategy. And there are actually many ways you can invest in gold, even as a beginner.

Why invest in gold?

Before we get into how to invest in gold, it can help to understand why gold is still a sound investment in 2021. The biggest reason is that gold is considered to be an inflation hedge.

An inflation hedge is an investment that protects the purchasing power of currency from rising costs due to inflation. An inflation hedge either maintains or increases its value over a long period of time.

For instance, the dollar bill is not an inflation hedge because its value decreases over time. In comparison, an ounce of gold can still purchase roughly the same amount of goods as it could 200 years ago.

You don’t want to have all of your assets tied up in gold. But for investors that are looking for ways to protect themselves from inflation, buying gold isn’t a bad choice. And gold can help you diversify your portfolio outside of the stock market.

Pros and Cons of Investing in Gold

There are many advantages to investing in gold, but there are downsides to consider as well. If you’re on the fence about whether or not buying gold is the right strategy for you, here are a few pros and cons to think about first.

Pros

  • Gold has intrinsic value
  • It can serve as a hedge against inflation
  • A good way to diversify your portfolio
  • Buying gold can provide a feeling of security
  • It’s fairly easy to buy and sell gold coins
  • There are multiple ways to get started investing in gold

Cons

  • It can be hard to know if you’re getting a good deal
  • Storing gold can be expensive
  • Dealers can charge a number of hidden fees
  • Gold doesn’t pay interest or dividends

5 Ways to Invest in Gold

Now that you understand why gold is a good investment, you may be wondering how to get started. Well, it’s actually easier than ever to invest in gold because there are so many options available.

However, this can cause many new investors to feel overwhelmed and unsure of how best to start. If you’re new to investing in gold, here are five solid options you can consider.

1. Physical gold

The most straightforward way to invest in gold is by purchasing physical gold, either online or in-person. You can buy gold bars, coins, or bullions from gold dealers.

There are advantages to going this route, and the biggest is that it’s a tangible asset that you own. Having a tangible asset can provide many people with a sense of security, and more control over their investment.

However, if you purchase gold coins or bars, you’re going to have to choose carefully when it comes to the company you work with. Some dealers will mark up the price of gold heavily, so it can be hard to know if you’re getting the best deal.

And if you purchase physical gold, you’ll need to have a way to store it, so you’ll likely end up paying storage costs. Plus, gold is not a liquid asset, so you may have a hard time selling it down the road.

2. Gold mining stocks

One of the biggest issues many people have with investing in gold is that there’s no growth potential. Sure, gold retains its value, but it’s not going to earn you any money, which is the entire point of investing.

If this issue has been holding you back from buying gold, then you might consider gold mining stocks. Instead of purchasing physical gold, you’ll purchase stocks of companies engaged in mining precious metals.

There are many gold mining stocks that consistently outperformed the market during the fallout of COVID-19. For instance, Goldcorp, Franco Nevada Corp., and Kirkland Lake Gold Ltd. are all good options you can consider.

However, you aren’t really investing in gold; you’re investing in that business. And that always comes with inherent risks. If you choose to go this route, you’ll need to pay close attention to what’s going on with that company.

3. Gold exchange-traded funds (ETFs)

Gold ETFs are a great option for anyone that wants to invest in gold without having to pay for storage costs. An ETF holds gold bullions at a storage facility and allows investors to buy shares of the fund.

Gold ETFs are a great option for beginners because you can invest in the asset without having to physically manage it yourself. You can purchase gold ETFs through a regular brokerage firm.

4. Gold certificates

Gold certificates are another way to invest in the asset without having to physically purchase it and store it yourself. Essentially, you buy a note issued by a company that owns and sells gold. The note isn’t issued for any specific type of gold, but the company verifies that it has the assets to back the note.

Gold certificates are not a bad option for beginners, but you’ll need to choose the company wisely. Otherwise, it could be easy to fall prey to scam artists. If you’re not sure about going this route, then gold ETFs may be a better option for you.

5. Gold mutual funds

And finally, if you’re interested in the idea of owning stock in companies that deal with gold, you might consider investing in a gold mutual fund. A mutual fund allows you to own a portfolio of gold mining companies, as opposed to just investing in one company.

A gold mutual fund is a great way to diversify your portfolio, though the fees may be higher. If you’re considering this option, you’ll want to find a broker that you trust who can advise you.

What’s the Best Gold Investment Strategy for Beginners?

If you’re new to investing in gold, then you may be wondering what the best option is. The truth is, there are no perfect investment strategies, so you’re going to have to evaluate the risks and rewards of each one.

Consider what your goals are and why you want to invest in gold. If your only strategy is to protect yourself against inflation, then buying physical gold may be the right choice for you. Whereas, if you want an income-producing asset, then gold stocks or mutual funds may be a better choice.

Just keep in mind that gold should only be one part of your total investment strategy. Ideally, it will be less than 10% of your total portfolio. That way, you’ll diversify your assets without putting too much at risk.

Bottom Line

By now, you understand what the benefits and downsides are to investing in gold, as well as your options for getting started. If you want to move forward and begin investing in gold, it’s best to start small and slowly increase your assets over time.

Make sure you do your homework when it comes to the company you choose to work with. When you talk to potential companies, try to get a sense of how transparent they are and forthcoming about the fees they charge. It’s also a good idea to check their ratings and reviews so you can see what kind of experience other customers have had.

But if you take your time and invest wisely, you could protect yourself from future market downturns.

Source: crediful.com

How To Build Wealth In Three Easy Steps

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Do you want to learn how to build wealth?

When it comes to building wealth, there are several strategies and even more opinions. Some people get lucky, like winning the lottery, inheriting vast sums of money from their long-lost uncle, or being fortunate enough to buy that one in a million stock that explodes in value.

The majority of us aren’t lucky enough to be in the right place at the right time. Instead, for the people who want a happy early retirement, we have to accumulate wealth over the long run using a strategic how to build wealth plan. Banking on getting lucky at some point in your life is a losing endeavor for most, but wealth can be obtainable for those who take the time to understand these three simple steps:

  • Make money
  • Save money
  • Invest money

Execute these three steps properly, and accumulating wealth is not only achievable but likely.

In This Article

How to Build Wealth Steps

If you can master these three steps, making money, saving money, and investing money you will be on your way to building personal wealth.

Making Money

How one makes money is one of the most difficult and important decisions in a person’s life. To complicate the matter further, this is usually a decision that someone is forced to make when they’re still a teenager and with limited world experience. Someone faced with this decision should consider the time and cost of the education, the earnings potential of that career, and if it’s something that they can see themselves doing for the next 40 years of their life.

Making money is a fundamental step to ensure a fruitful and enriched life. If the career you’ve chosen doesn’t compensate you adequately, many people decide to add side gigs for additional earnings. The good news is, side gigs are usually added later in life when people have more experience and ability to select something they enjoy doing. In some situations, side gigs end up becoming more profitable than the main gig.

Saving Money

It’s important to understand that saving money and investing money are not the same thing. Saving money starts with good spending habits, not buying stuff you don’t need, and making good choices on the money you do spend. Staying away from extremely high margin items, no matter how small those purchases are, is an excellent place to start. Going to the movies once a month and buying $20 worth of snacks that’s only worth $2 can add up dramatically over a lifetime.

Spending large amounts of money on depreciating assets is also a losing strategy. For example, spending $35,000 on a brand-new car versus buying the same two-year-old model for $25,000 will have a dramatic effect on long-term wealth.

Most people don’t understand the long-term time value of the dollar, and by doing so, people end up spending money without putting much thought into it. For example, if a 25-year-old decided to buy a used car versus a new car, and instead saves $10,000 for investing, their long-term wealth would substantially be increased. You might not have the same shiny car your friend has, but you’ll likely retire a decade before them. You need to ask yourself, would you rather drive a shiny new car in your 20s or retire ten years sooner? Don’t think that’s the case… I’ll explain further on.

how to build wealth

Investing Money

Investing money is the process of buying assets that are likely to appreciate over time. The value of money is always decreasing, so simply keeping money in the bank is not an intelligent strategy for building long-term wealth.

If a gallon of milk costs $5 today and costs $6 five years from now, that’s a 20% increase in the cost of goods. This means you would have made 20% on your saved capital just to sustain the same standard of living. To gain wealth, you would’ve had to of gained more than 20% on your saved capital, which would put you ahead of the game. Fortunately, this is relatively easy to do.

To give you an idea of the power of investing, let’s invest that $10,000 you saved from buying a two-year-old car versus the new car. If you were to invest that money at 8% annually, which would be extremely easy to do based on historical averages, at the end of the year, that $10,000 would now be worth $10,800. That would then compound on itself, and by the end of year two, you would now have $11,664. This keeps going on and on. By the end of five years, your money is now worth $14,693.

how to build wealth

For the person that decided to buy a used car at the age of 25 and save that $10,000, investing it intelligently, by the time they were 55 years old, their $10,000 would be worth $100,626! That’s the power being able to make money, then make smart decisions with the money, and then investing it intelligently. Just imagine what it’s like for people who achieve even higher rates of return on their capital.

Getting There

For those who put in the time to learn how to invest properly, much larger returns are obtainable. To put this in perspective, if the same person put their $10,000 to work at an 18% annual interest rate, they would have a payout of $1,433,706 at the end of 30 years. That’s not an exaggeration, and that’s if they never saved anything again! Just imagine if you saved more and implemented a solid investment plan.

Too many people put their retirement, arguably the most valuable asset they have, in the hands of a stranger. People acquire lots of different skills over their lifetime; learning how to invest their own money is definitely a skill that everyone should take the time to learn. The reason being, nobody cares more about your money than you.

Over the long run, no strategy beats investing in the stock market. Many investors fear the stock market due to the volatility. However, investors can’t make the best returns if at least a portion of their savings isn’t in the area where the best returns are achieved. And when you combine stocks with options, not only are investors able to mitigate risk, but even higher levels of performance can be achieved. The smartest investors like Warren Buffett and Peter Lynch achieve great success by combining a stock and options strategy, but anyone can do it.

Take Control of Your How To Build Wealth Plan

For people who want to take control of their wealth and learn options trading for FREE, so that they can put their saved capital to better use, OptionStrategiesInsider.com has you covered. Their options trading strategies teach users how to mitigate risk, diversify an already existing stock portfolio, and make above-average returns using less capital within their portfolio. This ensures smart investors a happy medium between risk and reward, enabling them the ability to achieve their long-term financial goals.

Chris Douthit, MBA, CSPO, is a former professional trader for Goldman Sachs and the founder of OptionStrategiesInsider.com. His work, market predictions, and options strategies approach has been featured on NASDAQ, Seeking Alpha, Marketplace, and Hackernoon.

Source: debtdiscipline.com

The 8 Best Vanguard Funds for Long-Term Investments

If you’re busy and want to invest your money in the long term, you will love the best vanguard funds. They are cheaper.

They are high quality funds, well diversified, and professionally managed.

Thus, vanguard funds are a favorite for long-term investments and for retirement.

Vanguard mutual funds, like any mutual funds, are money invested by investors. They are pooled together in a single investment portfolio. The mutual fund is then managed by a professional manager who then use the money to buy a bunch of stocks, bonds or other assets.

With Vanguard index funds, they are passively managed. That is, they are managed by a computer with its only job is to track an index, such as the S&P 500.

Nonetheless, both mutual funds and index funds are cost-efficient and a huge time saver for a busy investor. And because of that, the best vanguard funds are superior investment vehicles for long term-investment. 

In this article,  we will discuss the 8 best vanguard funds that offer a high-quality, cost and time-efficient way to invest in the stock market.

Understanding the Advantages of the Best Vanguard Funds

Before jumping into the best vanguard funds, it’s important to go over the main reasons for investing in mutual or index funds rather than individual stocks, bonds, or other securities.

Diversification. You have probably heard of the popular saying “don’t put all your eggs in one basket.” Well, if so, it applies well to mutual and index funds. Diversification is when you have a mix of investment to help control the total risk of your investment portfolio.

Unless you have a lot of money, buying individual stocks yourself can be costly. But with a mutual or index fund, you’re able to buy dozens of stocks and invest in different types of stocks in a variety of industries, thus diversifying your portfolio.

Because you invest in multiple stocks across various industries, you are spreading your risk. If one stock plummets, the others can balance it out. Most Vanguard funds, if not all, are diversified.

Low minimum investment. Another benefit of Vanguard funds is that they require a reasonable investment minimum. Some Vanguard mutual funds require a minimum of $3000 to invest. They also offer a monthly investment plan, so you can start with as little as $20 per month.

Cost efficiency. The charges that you pay to buy or sell a fund can be significant. However Vanguard funds are known to cost way less than the average mutual fund.

Professional management. Even if you have a lot and you are an expert in investing, investing your money in a Vanguard mutual fund is a huge time saver. That means once you buy your fund and contribute to it monthly (however you chose), you can just forget about it.

A Vanguard professional manager takes care of it for you. Plus, vanguard fund managers are experienced, well educated. So you don’t have to worry about an inexperienced manager running your money.

These are the reasons why investing in the best vanguard funds is better than investing in individual stocks and/or bonds.

However, one of the drawbacks with vanguard funds, as with all mutual or index funds, is that you don’t have control over your investment portfolio. Leaving your money to someone who decides when and what to invest in can be difficult for you if you’re someone who likes to be in control.

So, if you like to be in control and things yourself, you may want to develop your own investment portfolio and not relying on these Vanguard funds.

Are you a long-term investor?

Think about yourself and your goals before choosing these best Vanguard funds.

What are your investment goals? Do you plan on holding these funds in the long term?

A long term investor is someone who puts money into an investment product for a long period of time.

If you plan on investing money to achieve some goals in 2 years, such as buying a car or going on a vacation, you should not use these Vanguard Funds.

That is because stocks and bonds can rise and fall significantly over a short period of time. That makes it possible to lose some or all of your money. Moreover, if you need cash in a hurry, a Vanguard fund is definitely not the right investment for you.

So you’re better off using short-term investments for these kind of goals.

But if you want to build wealth for the long term or your goal is to retire in 20 or 40 years, these Vanguard funds are for you.

Likewise, what is your appetite for risk?

A long-term investor should be aware of the risks involved in investing in the stock market. They should know their own risk tolerance. Some investors are more cautious than others. Some can take risks and are able to sleep well at night.

These vanguard funds carry different level of risks. Some are more conservative than the others. 

Therefore, before you start buying Vanguard funds, figure out whether you are a long term investor. In other words, don’t keep money in funds unless you plan on holding them for at least 5 years.

The 8 Best Vanguard Funds to Buy Now for Long-Term Investments

Now that you have a pretty good idea of why a Vanguard fund is a good long-term investment, and you are aware of your risk tolerance, below is 8 of the top and best Vanguard funds to buy now for the long term. If you have questions beyond Vanguard funds, it may make sense to work with a financial planner or financial advisor near you.

Vanguard Total Stock Market Admiral (VTSAX)

  • Minimum initial investment:$3000
  • Expenses:0.04%

The biggest and perhaps one of the best Vanguard funds is the Vanguard Total Stock Market. The fund was created in 1992. It gives long term investors a broad exposure to the entire US equity market, including large, mid, and small cap growth stocks. Some of the largest stocks include Apple, Facebook, Johnson And Johnson, Alphabet, Berkshire Hathaway, etc…

This Vanguard fund has all of the attributes mentioned above, i.e., diversification and low costs. Note this fund invests exclusively in stock. So it’s the most aggressive Vanguard fund around.You need a minimum of $3000 to invest in this fund. The expenses are 0.04%, which is extremely low. Note this is also available as an ETF, with an expense ratio of 0.03%.

Vanguard 500 Index (VFIAX)

  • Minimum initial investment:$3,000
  • Expenses: 0.04%

If you want to have your money invested only in American assets, this Vanguard fund is the right one for you. The Vanguard 500 Index, as the name suggests tracks the S&P 500 index.

This index funds gives you exposure to 500 of the largest U.S. companies, spreading across different industries, making it one of the best Vanguard funds to have. Some of the largest companies you might already know include Microsoft, Apple, Visa, JP Morgan Chase, Facebook, etc. It has a minimum investment of $3,000 with an expense ratio of 0.04&, making it one of the best Vanguard funds to have. 

Vanguard Wellington Income Investor Share (VWINX)

  • Minimum initial investment:
  • Expenses:

If you’re aware of risks involved in investing in stocks and you have a low tolerance for risk, the Vanguard wellington Income is for you. This fund allocates about one third to stocks and two thirds to bonds, making it very conservative.

Another good thing about this Vanguard fund is that it invests in stocks that have a strong track record of providing dividend income to its investors. So, if you are one of those long term investors who has a low appetite for risks and who likes to receive a steady dividend payment without a lot of volatility in the share price, you should consider this fund.

Vanguard Star (VGSTX)

  • Minimum initial investment: $1,000
  • Expenses: 0.31%

The great thing about this Vanguard fund is that the minimum investment is relatively low ($1000), making it a good choice among new investors. Plus, it’s well balanced.

It is invested 60% in stocks and 40% in bonds. For those investors looking for a broad diversification in both domestic and international stocks and bonds, this fund should not be overlooked.

Vanguard Dividend Growth (VDIGX)

  • Minimum initial investment:$3000
  • Expenses:0.22%

Vanguard Dividend Growth, as the name suggests, focuses on companies that pay dividends and have the ability to grow their dividends over time.

If you’re an investor with a long term focus and likes to receive a steady dividend income, you may want to consider this fund. The minimum investment is $3000 with an expense ratio of 0.22%.

Vanguard Health Care (VGHCX)

  • Minimum initial investment: $3,000
  • Expenses: 0.34%

As the name suggests, Vanguard Health Care only invests in the Health Care Section. That’s the only downside. Apart from that, it gives investors a great exposure to various domestic and international companies within the health care sector, such as pharmaceutical firms, research firms, and medical supply and equipment companies.

If you’re considering this Vanguard fund, you should also have another and more diversified fund to reduce your risk.

Vanguard International Growth (VWIGX)

  • Minimum initial investment: $3000
  • Expenses: 0.43%

If you’re looking to build a complete investment portfolio and want to have more exposure to foreign stocks, the Vanguard International Growth is the one of the best Vanguard Funds to accomplish that goal. The fund focuses on non-U.S. stocks in developed and emerging markets with a high growth potential.

However, one thing to consider is the high volatility of this fund. Because it also invests in developed countries, the share price can rise and fall significantly. So you should consider this fund if you want more exposure to foreign stocks. But you also want to have another fund as well to balance it out. The minimum initial investment is $3,000 with an expense ratio of 0.43%.

Vanguard Total Bond Market Index (VTBLX)

  • Minimum initial investment: $3000
  • Expenses: 0.05%

Bond funds may be appropriate and advantageous for long term investors who want a bond fund that invests US and Corporate bonds. If that’s your goal then the Vanguard Total Bond Market Index is the right one for you.

Just as any Vanguard funds, it’s cost efficient, safe and high quality. It has a minimum initial investment of $3,000 and an expense ration of 0.05%. Also note that this fund is also available as an ETF.

The Bottom Line

If you’re looking to invest in mutual or index funds, those are the best Vanguard funds to buy now and hold for the long term. They are high quality, low-cost, and are safe. 

Related:

Speak with the Right Financial Advisor

  • If you have questions beyond knowing which of the best Vanguard funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).

Source: growthrapidly.com

Traditional And Roth IRA Contribution Limits Announced

A few days ago I wrote a quick post giving full details about what changes we could expect to see in the 2021 401k contribution limits.

So how much was changing?

The short answer is that we saw no change in the contribution limit from last year, it remains at a limit of $19,500.

If you have an IRA in addition to or instead of a company 401k, you’ll want to make sure to stay on top of any increases in contribution limits there as well.

Contribution limits are lower in the IRA than the 401k to begin with, so if an increase happens, be sure to take advantage.

So what is happening with the IRA contribution limits this year?

The IRS has announced that the amount that you can contribute to a traditional or Roth IRA for 2021 will remain unchanged.

Don’t have a Roth IRA yet? Check out these posts talking about the best places to open a Roth IRA, or our list of best robo advisors.

Contribution Limits For Roth & Traditional IRA In 2021

The contribution limit for both Roth and Traditional IRAs will remain the same this year.

If you are under 50 years old that means you can still contribute $6,000 to your IRA accounts, same as last year.

50+ years old?  You’re also able to make a catch up contribution of $1,000 – which pushes the contribution limit to $7,000.

The limit for the Roth and traditional IRA is a shared limit, so keep in mind if you contribute to one, the limit for the other is reduced. The $6,000 is a single combined limit if you want to max out your contributions.

For example, if you contribute $4,000 to your Roth IRA, you could only contribute $2,000 to your traditional IRA (bump that up by $1,000 if you’re over 50).

Here’s a table showing the 2021 Traditional and Roth IRA contribution limits, along with the limits in years past.

Year Age 49 and Below Age 50 and Above
2002-2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008-2012 $5,000 $6,000
2013-2018 $5,500 $6,500
2019-2021 $6,000 $7,000

AGI Based Income Phaseouts For Roth IRAs In 2021

Roth IRAs have an income phaseout. What that means is once you reach a certain level of income the amount of you can contribute goes down, and gets completely phased out at the upper level of the range.

For Roth IRAs single taxpayers, head of household, or married filing separately (IF you didn’t live with your spouse during the year) with an annual Modified Adjusted Gross Income (MAGI) over $125,000, you’ll begin to see the allowable contribution drop until at $140,000 it goes away completely. The limits for married filing jointly investors are $198,000-$208,000. Here are the limits:

Roth IRA Income Limits For Contributions (2021) Contributions are reduced if income is above this amount Contributions are not available if income exceeds this amount
Single/Married Filing Separate IF you didn’t live together during the year. $125,000 $140,000
Married Filing Jointly or qualifying widow or widower. $198,000 $208,000
Married filing separately IF you lived with your spouse at any point during the year. $0 $10,000

So what does this mean in practice?

If your income is less than the number in the first column, you can contribute the full $6,000 for those younger than 50.  If you’re 50 or older you can contribute $7,000.

If your income is higher than the amount in the second column, you aren’t able to contribute to a Roth IRA in 2021, barring something like a back door Roth IRA conversion.

In your income falls neatly into the range above, you can still contribute a prorated amount.

For single taxpayers, for every $1,500 you make above the number in the first column, you’ll lose 10% of your $6,000 max contribution.

For married taxpayers, you’ll lose 10% for every $1,000 in income above the first column amount.  Here’s an example of how this looks from Motley Fool:

As an example, say that you’re 48, married, and have a joint income of $205,000. Looking at the chart above, your income exceeds the $193,000 lower threshold by $7,000. At a rate of 10% per $1,000, that means that you’ll lose 70% of your contribution. For someone younger than 50 with a maximum of $6,000, the reduction will be $4,200, leaving you with a final allowable contribution of $1,800.

Contributions Can Be Made Until Tax Day 2021 For 2020!

If you have a Traditional IRA or Roth IRA, one thing a lot of people don’t realize is that the time to contribute to your account doesn’t end when the clock strikes midnight on December 31st. In fact, if you haven’t contributed the allowed contribution amount by December 31st, you have all the way until tax day to contribute to your account for the previous year.

In fact, you can still open a Roth IRA or a traditional IRA and contribute the fully allowed amount up until tax day. Tax day for 2021 will fall on Thursday, April 15th, 2021. So not only can you contribute at the end of this year, you can contribute right up until your taxes are due!

If you do make a contribution in 2021 before tax day, make sure you specify which tax year the contribution is being made for.

Keeping Tabs On Limits And Phaseouts

When you’re contributing to a Roth or Traditional IRA you’ll want to keep an eye on the limits and phaseouts.

If your income is reaching phaseout thresholds, you may want to consider reducing your taxable income by contributing to an account like a 401k, or reducing your taxable income by making charitable contributions, etc so that you can continue to be eligible for the account type.

Are you increasing your contributions this coming year, even though the limits haven’t increased?

Traditional And Roth IRA Contribution Limits Announced

Source: biblemoneymatters.com

Forex Trading Margin: What Is it, and Why Should You Care?

Forex trading and investing

The Forex industry is a very interesting one in that Forex traders have the ability to trade in far more currency than their principal investments would generally allow. This is the result of what’s known as a “trading margin.” So what is this trading margin, and why exactly should you care? Let’s talk about it!

Forex Trading Margin: What Is It?

A Forex trading margin is a ratio that defines the leverage a trader has in the market. Trading margins in the world of Forex range from 10:1 to 50:1 on average. So, when it comes to Forex trading, a $1 principal investment gives the trader the ability to trade from $10 to $50 worth of currency.

Forex Margins Are the Same as Stock Market Margins…Right?

For the most part, Forex margins and stock market margins are about the same. However, there are a few key differences:

  • Margin Interest – A trading margin is essentially a loan. For every dollar the investor puts up, the broker adds a significant amount of money in Forex. However, Forex brokers generally don’t charge interest on the money they put toward your investments. On the other hand, stock brokers generally charge interest on these loans.
  • Margin Size – In the stock market, brokers generally offer 2:1 margins; however, in the Forex market, the minimum margin a trader will generally find is 10:1. Therefore, Forex margins give traders more leverage in the market than stock market margins.
  • Margin Calls – Forex traders generally aren’t susceptible to margin calls. Unfortunately, that’s not the case for stock market investors. A margin call happens when a trade moves against the trader. At this point, brokers will require the investor to add to their cash deposits.

Forex trading and margin trading

Forex Trading Margins: Why You Should Care

Margins can work for you, and they can work against you. To be profitable in Forex, it’s important to understand the advantages added by margins as well as the risks. Here’s how the advantages and risks work:

  • Added Advantage – Think about what leverage really does for Forex traders. With $200 as a principal investment and 50:1 leverage, Forex traders can take advantage of movements on $10,000 worth of currency. That gives traders a big advantage when it comes to realizing gains in the market.
  • Risks – On the other hand, high margins can also work against you. That’s because when trades don’t go in your favor, the size of the loss you take will be increased by the margin.

Final Thoughts

If you’re looking to trade Forex, it’s worth the time to do a bit of research on trading margins and how they can help you as well as hurt you. Leave a comment below if you have any specific questions!

This article was written by Joshua Rodriguez, owner and founder of CNA Finance.

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