An intro to index investing

This post is intended for a novice investor.

Introduction

I was inspired to start this blog to encourage friends and family to begin investing. Most of them are mathematically inclined, which means I don't need to extol the virtues of compound interest. Rather, the barrier is psychological--they don't realize how easy it can be. While there are risks with investing (more on that later), when these are laid out all upfront, it can be quite intimidating and delay entry into the world of investing.

I know from personal experience. I had meant to start investing from an early age--after graduating college in 2008--but didn't know how to get started. What stocks do I pick? What if the market goes down? Should I buy when stocks are at an all-time high? Where do I open a brokerage? Do I need a financial professional? I would always wait until I had enough time to become "knowledgeable enough" and "wealthy enough" before I committed to investing.

News flash: commission-based financial advisors aren't incentivized to work with your broke ass before you start making real money, so you might as well start learning the ropes. By the time I realized this, I missed out on 16 years of an incredible bull market--$10000 invested in the S&P 500 in July 2024 after I graduated would have returned over $65000 through December 2024 (12.0% annualized returns). For my younger friends and family, considering their career options, the opportunity cost of not investing at a young age is enormous, as illustrated in the following example.

During my senior year, I considered several career options. One was to pursue an MD/PhD and a career as a physician scientist. The other was to take a position in tech or engineering. (I also considered graduate school without the MD, although this is less relevant for this example.) I don't regret following my passion and choosing the first option. However, from a financial perspective, this was unequivocally the wrong move. While I will likely have twice the income by the end of the process as a physician or physician scientist, if I had chosen the second path and consistently invested during this time, the lifetime returns from just my 2008-2024 contributions alone would likely exceed the cumulative salary and investment returns as a physician. This highlights the power of long-term investing.

Index Investing Made Simple

There is considerably more nuance but investing does not have to be complicated. Here is the three-minute version:

1. Pick a reliable brokerage such as Fidelity, Schwab, or Vanguard. There are other options (which I use) that come with promotional bonuses or existing relationship benefits, but for a starting investor, the ability to invest fractional shares and/or to "sweep" uninvested cash will likely be important.
2. Identify whether you will be contributing to taxable brokerage accounts or IRA accounts (also called tax-advantaged, or both. You may also have another tax-advantaged retirement account (401k, 403b, or 457b) through your employer.
   1. If you have a taxable brokerage, you'll probably want to stick with exchange traded funds (ETFs) for step 4.
   2. If you have a 401k, 403b, or 457b, you likely need mutual funds for step 4 (unless your retirement account specifically allows for ETFs).
   3. If you have an IRA (either traditional IRA or Roth IRA), either ETFs or mutual funds are likely options for step 4. ETFs are more flexible (and my preference).
3. Contribute money to your account. Even if you don't have much to spare yet, start with a small amount so you familiarize yourself with the process.
4. Start investing. For most beginning investors, I suggest that most of your investment go to an ETF or mutual fund that tracks either the S&P 500 (essentially 500 of the largest companies in the U.S.) or the U.S. Total Stock Market, each of which have returned about 9.2% annually since 1871 and 11.0% since WW2. The majority of active managers fail to beat the S&P 500--nearly 95% over a 20 year period ending in 2022.
   Listed below are some ETF and mutual fund options, all of which have a low expense ratio of 0.03% or less, meaning they take $3 per $10000 invested yearly. This is automatically priced into the ticker price, so you don't have to deal with the process of "paying the fees".
   1. S&P 500:
      1. ETF options: VOO, SPLG, IVV
      2. Mutual fund options: VFIAX, FXAIX, SWPPX
   2. Total US Stock Market:
      1. ETF options: VTI, ITOT, SCHB
      2. Mutual fund options: VTSAX, FSKAX, SWTSX
5. (Optional) Add additional stocks. Most investors do a terrible job picking individual stocks, but if you're inclined to do so, I would limit this to a small portion of your portfolio and to only blue chips unless you're a seasoned investor.
6. (Optional) Add bonds. I don't personally own bonds, but they constitute an important part of modern portfolio theory. For a beginner considering whether to start the investment process, particularly at a young age, this may be probably unnecessary but should be revisited later to help tune your portfolio appropriate to your individual risk tolerance.
7. (Optional) Add international diversification. I currently don't have international equities, but there are merits to doing so. This shouldn't be the first priority of someone deciding whether to start investing. I plan to discuss this more later.