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Welcome to another edition of Stock Market Basics.
When you sit with your 401k adviser at work and browse through their literature it can get confusing.
Frustrating.
I mean this is your retirement you’re saving for, the least they can do is to make everything clear.
Where is your money really going?
Let’s go through some basics in the stock market.
Index Fund Definition
When you buy a stock in an individual company you are buying a small piece of that company.
Individual stocks make up the Market.
When you buy an index fund you are buying the Market.
Instead of trying to find diamonds in the rough, you’re buying the whole mine.
Guaranteed to get some diamonds.
Also guaranteed to get a lot of worthless rocks.
But as a whole you’ll still do better than money managers trying to pick the right stock for their clients.
In fact Warren Buffet made a bet that over 10 years the index fund that tracks the S&P 500 would beat the major money managers.
He won that bet pretty easily.
Popular Index Funds
VOO and SPY are two popular index funds that you can buy to passively invest and track the market.
If the market keeps going up, your shares are worth more money.
If the market takes a nosedive, so does the value of your shares.
One popular way with the personal finance blogs to invest is to throw your money into a Vanguard Index fund like VSTAX.
There’s another way to save even the low fees that Vanguard offers.
And you can do it without the $3,000 minimum investment requirement required by Vanguard for Admiral shares.
Robinhood.
They’re a new player to the game.
Robinhood is an app on your phone that offers zero fee investing in the stock market.
It’s popular with the bro community trying to make a quick buck options trading and Yoloing.
Take advantage of the platform. You don’t have to follow their strategy.
Sign up for Robinhood and buy SPY or VOO instead.
That way you buy the market for no extra fees.
Why I’m not a fan of Index funds for everyone
You probably already have money in a fund at the very least in your 401k.
You’ve read personal finance blogs.
They often talk about people that got out of massive debt, invested in index funds, and are able to retire at 30.
Investing legends like Warren Buffet and Jack Bogle even advocate for them.
It sounds great, so why don’t you put some money there too?
It clearly works.
And when you’re buying a fund you don’t have to research individual businesses.
You’re buying the whole market.
The media likes to bring up the fact that passive investing through funds has beaten the experts again and again.
So, why would I have anything against them?
The Case Against Index Funds
When you invest in a single company, like Apple, you are buying a small fraction of the Apple business.
That’s why it’s called a public company.
The general public owns a good chunk of it.
When you go through your broker of choice and choose to invest $10,000 in Apple you know you’re getting Apple.
Contrast that to SPY that tracks the whole market.
What are you really buying?
The whole market.
Mentally you’re no longer investing in businesses.
You’re just trying to make money.
Trying to find an easy way to make money.
You have enough on your plate.
You don’t have time to learn about investing.
You DCA your way into the market.
If a Recession Hits
The media and social media like to talk about recessions nowadays.
Let’s say it does happen and the market starts to tumble.
You are using the market as an easy money machine.
As soon as you see your passive income streams start to tank you’re pulling your money out.
So is everyone else.
You’re selling near the bottom.
So you end up losing a lot of money.
I have the same amount of money only in Apple.
Apple shares also tank with the rest of the market.
You know what people are still doing though?
Streaming Apple music and podcasts from their iPhone to their Apple earbuds.
Drawing on their iPad with their Apple pencil.
You’re panicking thinking the horrible economy is the new normal.
I’m confident that Apple is still making money.
Instead of selling my Apple shares I’m buying more while they’re cheap.
Backing up that Brinks truck.
Eventually, and this can take years, the economy comes back.
You’re at your desk thinking of getting back in the market.
The job market is good, economy looking stronger.
That SPY keeps going back up.
Time to get your money working again.
Meanwhile what do you think has happened to my Apple shares?
I Dollar Cost Averaged my way down during the downturn, collecting and reinvesting dividends the while time.
I watch the value of my Apple shares return to their highs.
You’re thinking about getting back in the market.
I just made money by being patient.
Strategies Work, as long as you stick with it
“But I can do the exact same strategy with my SPY,” you’re thinking.
And you’re right.
Theoretically you can.
Chances are you won’t though.
Not when your emotions take over and you’ve lost over half of your investment.
Why?
Because you don’t care about the market.
It doesn’t matter to you that the shares you own represent actual businesses.
You only own index funds as a money making scheme that you’re trying to get on.
Deep down you think only the wealthy and stock brokers make any money in the market.
I’m trying to tell you that’s not true.
But only if you think like an investor.
Think like a business owner.
And learn the basics of the stock market.
Wrapping up
Robo investing, ETFs, index funds and other ways to passively and mindlessly make money in the market can work when everything is going well.
In fact, it’s what most people probably should do if they don’t have a lot of money for investing but are interested in the stock market.
But they should still think like business owners.
Because if you have any money in the market, that’s what you are.
You’re an investor.
You’re a business owner.
If you learned something from my rant and would like to invest further into your investing education, check out my $200 course on How to make $1000 a year investing in dividend stocks.
If you’re not ready to make that leap yet and want to stick with the basics, I also offer a cheaper course on Stock Market Basics.
It’s got everything from the blog and then some.
All organized for you so you don’t have to jump from page to page trying to learn everything on your own.
The best thing you can do is take action now! You’ll thank yourself later.
And if you really just want to go the No Fee, passive investing, easy mode Robinhood Index Fund route, here’s that link again so you don’t have to scroll back up.