Why Index Investing ?

I believe that there are probably countless of investing sites available in the Internet. This may not even be the first one you have encountered. But perhaps, I would like to just share a little personal story and how it got me started on index investing.

To begin, I would like to share a little childhood story.

I grew up in a pretty normal family. In my family, my dad is a more enterprising individual while my mum is much more traditional and risk averse. Growing up, I always remember how my mum tells me about not trusting financial advisors ( Sorry if there are any here ) and that one should never invest in the stock market. However I was in my teens then and often invested in stocks using my dad’s account. Of course, my mum wasn’t fully aware of that so I plead you to….

obama-shhh

Over the years, I realised that well my mum is right in some way.. Picking individual stocks by itself is a very risky endeavour and definitely not advisable if you are building for your retirement nest egg !

This is because not only are you exposed to the risk of the stock market, you are also exposed to risk of an economy downturn, downturns specific to your industry and mismanagement of the business.. If you would allow me, that’s really dangerous.

Having said that, I didn’t agree fully with my mum that we should put all our savings in the bank. I believe the best way to wealth generation comes from owning businesses. In my humble opinion, index efts are a good way to own some of the best businesses in the country. The best part, we can simply relax on the beach while the executives work hard to run it for us.

Welcome to the land of indexes !!

Before we go further…

Whats an index fund ?

From Investopedia:

“An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. ”

Well, in simple terms, you get to own some of the largest companies in the whichever country you invest in. In the case of S&P500, we are talking about the largest 500 companies in USA !!

Screen Shot 2017-06-13 at 10.25.45 AM.png

 Source : http://www.spdrs.com.sg/etf/fund/spdr-sp-500-etf-S27.html

And the returns have been pretty fantastic …

Screen Shot 2017-06-13 at 10.26.32 AMSource: http://www.spdrs.com.sg/etf/fund/spdr-sp-500-etf-S27.html

Granted, we have those really bad crises ( 911 Incident, 2003 SARS, 2008 Global Financial Crisis ).

But the indexes tend to trend upwards in the long run. This is because our economy tends to grow over time due to greater productivity and technology advancements. By investing in the index, we are exposed to the largest companies that are powering the economy. And the returns speak of themselves, a $10,000 investment in SPDR S&P500 in 1993 would have increased to about $90,000 today !!

In the subsequent pages, I will detail examples of how to get started in index investing as well as the options available. My goal is simple. If I can clear up some of the misconceptions surrounding index investing and hopefully simplify the process for you, I think I have succeeded. For myself, writing this blog also trains me to think about index investing and portfolio construction. Cheers !

– Kai

 

 

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