I like simple. I have about three months of living expenses in a checking account and every bill is paid out of that account. My paychecks deposit a little more than half my average monthly expenses into that checking account twice a month. The rest is spent buying a Vanguard Index Fund, specifically VTSAX.
You can read pages and pages of why VTSAX is the cat’s pajamas, but in a nutshell:
When you buy a Vanguard fund, you become a shareholder of Vanguard. When Vanguard makes money, you make money. Vanguard is the only investment company that I know of that uses this model. This is in comparison to a company like Fidelity. When you buy into a Fidelity fund, you’re a customer of Fidelity. When Fidelity makes money, only Fidelity makes money.
Hence Vanguard has the lowest fees. And fees matter.
Ambrose invested $20,000 with his friend Cornelius. Cornelius promised to get Ambrose a return of 7% per year and his fee would be .05% per year. Bartholomew invested $20,000 with Cornelius as well. Cornelius promised the same 7% return per year, but the fee he charged Bartholomew was 1% per year.
Ambrose’s effective rate of return is 6.95%. Bartholomew’s effective rate of return is 6%. Here’s where they stand after 20 years.
Ambrose has $76,673.59 and Bartholomew has $64,142.71. Ambrose and Bartholomew invested in the same exact item, but the cost to invest for Bartholomew was more than $12,500 higher than Ambrose’s cost to invest. That’s 63% of the initial investment. Even tenths of a percent matter given compound interest and time.
So now you understand my loyalty to Vanguard. My specific fund of choice is VTSAX. Here is what VTSAX’s prospectus says about this fund’s investment strategy:
The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq.
Emphasis mine. So basically, you always hold some of every stock available to buy in the United States.
This is, quite possibly, my favorite chart of all. The entire history of the stock market.
This is what I’m investing in with VTSAX. I’m betting on the United States, on civilization. This chart covers the crash of 1929, the Great Depression, two world wars, the dotcom bust and the latest recession, 128 years and counting.
When I buy VTSAX, I own a piece of every U.S. company it is possible to buy. Some companies lose money, go bankrupt and drop out of my fund. Other companies make money hand over fist and distribute it to me in the form of dividends.
Nobody has consistently beaten the market. A buy and hold strategy is the best PROVEN method to consistently make money in the stock market. An actively managed mutual fund or a day trader can have a lucky year and beat the stock market occasionally, but it is impossible to do so as consistently as a buy and hold strategy in an index fund. And when you do use an actively managed mutual fund or day trade, the expenses nibble at your returns in the good and bad years. I just showed you the chart of greedy Cornelius charging 1%. Imagine the chart of some funds that charge 3% in expenses.
When the market dips, which I guarantee it will, I happily notice that VTSAX is on sale. And as a thrifty person, I love sales. I put money in every month and celebrate the “sales” when it dips and the “returns” when it’s up. Slowly, but surely my net worth goes up.
*Of course I’m in my early thirties and have a strong stomach. I can afford it when the market drops. In fact, I’d LOVE if the market fell hundreds of points over the next few months. Clearance sale!