Playing the Long Game: Investing in Index Funds
Investing money can be a daunting prospect, and recently, my 19-year-old daughter, who studies at an American university and who graduates in 2021 asked me for advice on the subject.
The advice I gave her, from my own experience and study, is advice I’d like to share with you today, so you can enter the stock market with strategies that will help you maximise your investments and give you a clearer idea of how to navigate the stock exchange.
The important thing to keep in mind before we dive right in is the most important piece of advice I can give: If you don’t have the right temperament, if you aren’t patient, if you aren’t willing to watch your investment halve overnight and sit on your hands and wait for it to climb back up then steer clear. It’s not for you if you can’t play the long game, and as I will repeat, the long game is key.
In 2008, I sold my business and started investing in the share market. What I learned quickly, was that even though my money was in the United States, right where the action is, I was missing out of payouts because I was speculating instead of investing.
The difference is crucial. I was jumping in and out of the market for short-term gains, investing in individual businesses—that’s speculating. I once bought shares in Google, back when they were in the neighbourhood of $250 dollars a share. In 2009, those shares dropped, I panicked and sold. I was relying on short-term gains and couldn’t afford to leave money in shares as the value depreciated, waiting for that value to climb back up.
To give you an indication of how well that turned out, my decision to sell my shares in Google has cost me roughly $3.2 million.
Investing vs Speculating: Taking Your Time
Investing, on the other hand, is playing the long game. It’s what I suggested to my daughter, and it’s what I suggest to you now.
Invest in an Index Fund. For clarification, an index fund is a collection of the top businesses in a given market. For instance, the S&P 500 is the top 500 business in the United States, the NZX50 is the top 50 businesses in New Zealand. When you invest in an index fund, your money goes towards buying a portion of each one of the businesses listed— the S&P is 75% of all business in the United States, and 45% of the global market.
The beauty of the index fund is that it tracks the market, and over time outperforms most of the market. Index funds have lower fees as they are not actively managed, and numerous studies show that they consistently outperform every other type of actively managed fund.
So I did some maths for you. The average yearly income in New Zealand $49,000, so that’s an after-tax weekly income of about $750. My suggestion is to be investing 20% of your net income a month into an index fund like the S & P 500 which averages 7% p.a after inflation and reinvesting dividends. A lot of sources will suggest 10%, but once you get used to living without that 20% you won’t miss it. So 20% of that income a month is about $650, and so when you’re putting that into your fund a month after 10 years you’re looking at $110,000, and after that compounds for 20 years it’s $336,000.
After 20 years, that $650 has turned out $180,000 profit. That’s not bad. But you have to leave it there. If you start, like my daughter, at 20 or so, you have to be willing to leave it there until you retire at 65.
Where to Start
So where do you start? I recommend a few different sites you can check out, like Sharesies, Smartshares, Investnow. Sharesies is great if you only have $5, $10 to spare. If you’re a bit more of a serious investor then I have to recommend Smartshares and Investnow. The beauty of all three of these platforms is that you can buy into New Zealand funds or American funds, and you can get into the American market without having to send your money overseas!
So there you have it: my brief guide to investing. You can check out my Ask Nick video on this topic for more detail, and remember that the golden rule is temperament. Investing is a marathon, not a sprint and you’re in it to play the long game.