Thread by @itsKostasOnFIRE

7 reasons why index funds can make you a millionaire

/THREAD/

When the first index fund was introduced by Jack Bogle's Vanguard in 1976, people were laughing

They said it would be a sure path to mediocrity and a failure

Today it is considered the best and surest way to make you a millionaire

Here's why

1. Low expenses

Index funds are passively managed to try to approximate the performance of a specific index of companies

That way they have much lower fees compared to the more common mutual funds

Mutual funds charge around 2% of your assets per year, while passive index funds charge only 0.1-0.4%

That's 5-20 times lower than what you would normally pay

And if a 2% fee doesn't seem like a lot to you take a look at the numbers

• A 1% fee will wipe out 1/3 of your earnings

• A 2% fee will eat away 1/2 of your earnings

2. Diversification

By investing in index funds you are automatically diversified in

• Sectors
• Markets
• Countries
• Company sizes

There are even total stock market index funds, where you literally own all the companies in the market

Can't get more diversified than that

3. Keep It Simple Stupid

It only takes a few minutes per month to manage your investments

You set up automatic deposits every month after your paycheck hits your bank account

You invest in the same index funds every time

Investing can't get any easier

4. No panic trades

With individual stocks, you always have the risk of trading based on your emotions

You heard a rumor about a company or a hot new stock

So you sell the stock or go all in

With index funds, you stay the course and don't let emotions decide for you

5. You are the market

Actively managed funds promise you that they will beat the market

However, 90% of them underperform, and the 10% that beats the market does not do this every year

With index funds, you do not need to worry about this

You simply are the market

6. Reliable returns

You never know what individual companies will do 10-20 years from now

• Competitors enter the market
• The CEO resigns or retires
• They got left behind

With index funds, you know what to expect

You can rely on an average yearly return of 7-11%

This is based on the historical returns of the S&P 500 index, the most common benchmark in investing

That way it's easier for you to make plans for your retirement and your financial needs in the long run

By investing $300 every month on an S&P 500 index fund, you will become a millionaire after 40 years with an 8% annual return

Want to become a millionaire earlier?

Then invest more

$700 per month will make you one in 30 years

$1700 per month will make you one in 20 years

7. Low risk

You always have the risk of losing your money with individual stocks

Companies come and go but the market is always here

There is nearly 0% chance of losing your money with index funds

For that to happen it would take a nuclear world war or an alien invasion

And in that case, you would have bigger things to worry about than your brokerage account and the stock market

To summarize:

1. Low expenses
2. Diversification
3. Keep It Simple Stupid
4. No panic trades
5. You are the market
6. Reliable returns
7. Low risk

For these reasons, index funds are considered the best and safest way to becoming a millionaire

/END/

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