The world of investing is complex. Stocks, bonds, crypto, real estate, art, precious metals, insurance products. Weāre bombarded with investing āadviceā from every directionāby people who want to help and by media and salesmen who just want your attention and your money.
But when you separate the good advice from the bad, it turns out that there is a simple way to invest and get results. Not just okay results, but often much better results!
You only have to do a few things right. Make a couple of good decisions. And stick with them through the ups and downs of the market.
Read on to learn the simple way to invest in stocks with great results.
Why investing is so simple today
We live in the golden age of investing:
- There are low-cost index funds tracking every piece of the economy.
- Everything can be automated.
- Many funds have no minimum investment.
- You can buy fractions of a share.
- And thereās no trading fee when you buy.
When I started investing in the early 2000s, many of these features didnāt exist yet. I had to write a check to my stockbroker when I wanted to buy more shares of a mutual fund. ETFs (exchange-traded funds) werenāt popular yet, and the $7 trading fee was too high to buy $100 at a time.
When I got my first job out of college, I switched to Fidelity and had automated investing in my 401k. But ETFs still had their trading fees, and many funds in my Roth IRA had minimums that limited my options until I had more money to invest.
If you havenāt been investing for long, you might not see why this is so important. But these features have eliminated the barriers that kept many people from starting or continuing to invest.
The minimums were too high. The fees were too high. Or it was just too much work. So why bother?
There are no excuses to keep you from investing today!
The simple way to invest
The Simple Path to Wealth is a great book that simplifies investing for those whose idea of a great time doesnāt involve studying personal finance. The author, J.L. Collins, wrote the book for his daughter, who said, āBut dad, I know money is important. I just donāt want to spend my life thinking about it.ā
Itās also a must-read for anyone whose investments have become so complex or random that they donāt know why they own what they own. It will challenge your belief that a āsophisticatedā portfolio is a better portfolio.
1 One fund is all you need
The Simple Path to Wealth created a large group of die-hard fans whose entire portfolio is invested in VTSAXāa low-cost total US market index fund. VTSAX has a $3k minimum investment, but VTI is an ETF version without a minimum, so many now use VTI instead.
One of the core principles comes from this quote:
āThe simple truth is this: the more complex an investment is, the less likely it is to be profitable.ā ā J.L. Collins, The Simple Path to Wealth
A one-fund portfolio. It doesnāt get any simpler than that!
Why VTI?
J.L. Collins is a fan of Vanguard funds for a good reason. Vanguard invented the index fund, one of the greatest tools in investing. They also helped to lead the financial industry in lowering fees on index funds. When companies like Fidelity, Schwab, and Vanguard compete for lower fees, you win!
VTIāand VTSAXātracks the CRSP US Total Market index, which includes more than 3,700 companies of all sizes. Itās weighted toward larger companies, which makes it perform similarly to the S&P 500. And it has a great track record of high returns over time.
So by owning VTI, you own a tiny portion of almost every publicly traded company in America!
VTI isnāt the only good, low-cost total market index ETF, though. If you prefer Schwab, Fidelity, or iShares, you can use SCHB, FSKAX, or ITOT instead. They all track slightly different indexes, but perform 99% the same. And they all have very low expense ratios. Read this for a comparison.
What about the rest of the world?
The US stock market has been dominant for the last decade. And itās dominated by global companies like Apple, Microsoft, and Google. But thereās no guarantee that the US will be the best place to invest for the next decade. So why not own the entire world economy?
Thereās a fund for that too.
The best global index fund is another Vanguard fund. VT is Vanguardās Total World Stock ETF. It tracks the FTSE Global All Cap Index, which includes more than 9,000 companies of all sizes. The fund is still about 60% US and 40% international stocks, which would change if international companies grew faster than US companies someday.
I wonāt even mention any other global funds because none of them come close to VTās 0.08% expense ratio. If you want a global fund, this is it.
So, while you could make a two-fund portfolio with a Total US and a Total International fund, the simplest way to own the worldās economy is to own VT.
āSimple is good. Simple is easier. Simple is more profitable.ā
ā J.L. Collins, The Simple Path to Wealth
2 Automatically buy every time youāre paid
The simplest, most proven strategy for avoiding market timing and building wealth consistently is Dollar-Cost Averaging (DCA). DCA is the process of repeatedly investing a similar amount of money so that more shares are purchased when prices are low and fewer shares are purchased when prices are higher.
DCA happens naturally if you set up automatic investments that are deducted straight from your paycheck. Every time youāre paid, youāll be buying more shares at the current price.
My Investments Are Going Down, Now What gives a great example of the power of DCA to get great returns without needing to time the market.
Market timing is one of the traps that many investors get into. They get scared when the market is falling, and sell. Then they try to predict when the market is going to hit bottom, and most of the time it recovers before they get back in.
Predicting the future is impossible. Youāll either be wrong or lucky.
Automatic investing keeps you from making this mistake and investing based on emotion. Most investors perform worse than the market because they let their emotionsāfear, greed, and excitementādrive their decisions. And that leads to market timing. With DCA, you only need to make one decision, then put it on autopilot to make you money.
3 Automatically reinvest dividends
Some people get Dollar-Cost Averaging right, but forget to do the same thing with dividends. If your account doesnāt automatically reinvest dividends for you, you need to make that selection yourself!
Reinvesting dividends is another form of DCA. Every time you receive dividends from companies you own, you can either keep the cash or reinvest in something else. When you automatically reinvest in the same companies, you are performing DCA and letting that money continue to grow. If you keep it as cash, you are extracting value from those businesses and losing out on future gains.
According to Fidelity, reinvesting dividends has accounted for 40% of stock market gains since 1930, and an even higher 54% during periods of high inflation. Not investing those dividends could mean youāre taking a large amount of gains off the table.
So make it simple. Automatically reinvest all dividends until you need the income in retirement.
Summary
Thatās it. It can really be that simple to invest in stocks:
- Have a one-fund portfolio
- VTI if you want US companies only
- VT if you want to own companies across the world
- Dollar-Cost Average by investing automatically with every paycheck
- Automatically reinvest dividends to compound your returns
Youāll be tempted many times in life to make your portfolio more complex. And you should probably ignore the temptation 99% of the time.
But if you really want to take your portfolio to the next level, read What Should My Asset Allocation Be for Building Wealth Versus Retirement next. The approach in that article is what worked for me, and what Iām doing with my own portfolio today.
And donāt forget to sign up for FREE at the bottom of the page to get much more value from PathwayToFI.
Join me on the Pathway to FI!
