Index Funds Investing Made Easy

Index Funds/ETFs investing is pretty easy and straightforward. Many investors do not get the expected returns due to various reasons. The most important one would be trading their ETFs/Index funds rather than holding them long term.

There are two groups of people who made the most money in ETFs and index funds. I would tell who they are but let us look at the basics first,

As you know by now the ETFs/index funds that track the broad stock market ( either S&P500 or Total Stock) always go up in the long term.

S&P 500 Past Performance

Look at the performance of S&P500 as below,

The return for 10 years of S&P 500 was 191.76% from January 2010 till January 2020. The annualized return was 11.30% and if you had invested the dividend, the annualized return would be a whopping 13.53%.

However, only a small percentage of investors who invested in S&P 500 index fund from January 2010 till January 2020 actually made 191.76%. The reason being a lot of investors like to buy and sell ( in and out of the market) multiple times along the way!

Two groups of investors that can make the exact return from 2010-2020 in the S&P 500. They are,

1) Dead people who had bought the funds before 2010 and

2) Investors who have forgotten they owned/bought the index fund and kept it

So before putting your first dollar in the ETFs/Index funds, you have to promise yourself and make a vow that you would be patient and stick to your plan!

The simple plan that I am going to tell you would make you stand out and beats 80% of professional traders and fund managers! Yes, 80%! And remember to tell you unit trust agents that you won’t be seeing them forever after this.

Simple FIRE Masterplan

These are the steps for you to set up your Financial Independent, Retire Early (FIRE) masterplan,

Step 1- Decide your asset allocation

You have to decide the percentage of money to put in your equities ETFs and bond ETFs, please go to my previous post to learn how to decide on the percentage of each asset ( asset allocation)

Step 2- Buy the ETFs/index funds through your brokerage account

To make life easy for everyone, for equities/stock ETFs, I choose VUSD which tracks S&P500. If you are an American, please stick to VTSAX or VTI (tracks the total stock). You can choose VOO or VFIAX ( tracks S&P500) if you prefer. Either S&P 500 or the total stock index is good enough.

For Malaysians, Singaporeans, Europeans, and Asians, VUSD which is an Irish-domiciled ETFs listed on the London Stock Exchange is a great choice. The expense ratio ( ER) is only 0.07%. There is no alternative ETFs that tracks the total US stock available in the London stock exchange.

The reason for me to choose VUSD is the withholding tax will be 15% instead of 30% if I buy VOO instead.

For the bond index, I choose VDTY, which is a USD Treasury AAA bond. You can’t get the equivalent of VTBLX or BND which is a total bond market index ( government plus corporate bond) in the London stock exchange.

The expense ratio for VDTY is also 0.07%.

You must always keep some cash ( money ) in your account. I always keep some money in hand besides my emergency fund. Remember, the worst case scenario will be force-selling of your portfolio during bear market!

Step 3- Keep Buying and Don’t Sell

Yes, keep buying and don’t sell. Set up a mechanism and keep on buying. I make it a habit of buying every 2 weeks according to my asset allocation ratio. I rebalance my portfolio yearly or there is a huge correction of more than 10%. You have to rebalance your portfolio!

Portfolio re-balancing is an art you must master for you to achieve financial independence.

Step 4- Stick to you plan

Keep on buying until you reach your financial goal. If you need USD1 million to retire, you need to keep on buying until you achieve the target. How much do you need to retire? That’s a big topic to talk about and I would walk you through this process soon.

This is the simplest way of Bogleheads investment philosophy using two portfolios – one equity/stock ETFs and one bond ETFs.

Remember for you to be successful in ETFs/index funds investing, keep your strategy simple, and stick to it!

If you would like to add in world stock exposure, there are a few considerations to think about. In my coming posts, I would talk about a few strategies and combinations to get you started!