Most Profitable Index Funds for Diversification

There is one large misconception in the personal finance world. That it takes a specialized skillset or knowledge to invest your money. In reality there are indexes funds that have been making people wealthy for ages.

VOO/SPY

Both of these funds should be a starting place for index fund investing. They will both track the S&P 500 index, which tracks the market capitalization of the 500 largest companies in the United States. Although there are no guarantees, the overall financial markets have continued to make new record highs throughout history. Although there have certainly been massive corrections, the economy has always risen back and the stock market has increased in value as well. Overall, since financial markets were materialized the S&P 500 has averaged roughly 6% gains. If you look at more recent times, it may be closer to 10%, and note that these returns are without reinvestment of dividends. If you are reinvesting your dividends each quarter, these numbers are actually much higher (around 10%, and 14% respectively)

Bond Index

It will make sense to have a small portion of your capital in a bond portfolio, so that you have a fixed income every quarter. The idea is that as this builds as your wealth grows, so will that fixed income, and you should eventually be able to pay for your rent, mortgage and other expenses with that bond income. An ideal bond fund would be VBMFX which is an index that invests in bonds of the largest and most credit worthy companies in the United States (Similar to VOO, but for fixed income.)

International Index

It makes sense to put a portion of you capital in international markets, as it provides strong diversification benefits. Additionally, many emerging market economies and financial markets experience much higher growth than developed markets like the United States. Most brokers issue ETFs and mutual funds that track a basket of country stocks that are expected to experience high growth or are considered emerging market countries.

Real Estate Investment Trusts(REITs)

Real estate is an excellent diversification source. It is generally more risky, but therefore it also provides opportunity to make much higher returns than paper asset markets (VOO) in the range of 20-25% or so. The large return is the result of selling the asset once market prices increase after 3-10 years (sometimes it takes longer for markets to pop thus the wide range in timing).

REITs or real estate investment trusts, provide a way for retail investors to invest a lower amount of capital into real estate, so essentially they are funds that pool capital for real estate investing. REITS should pay around a 10% dividend because they need to pay out at least 90% of their income as dividends. If you have less than $100 to invest, REITS may be a great option for you.

Your Own Business

So we’re going to the throw a little twist in here, because obviously your own business is not an index fund, but that does not stop the fact that it is an excellent source of income and diversification. Also, there is nothing more pleasurable that creating a source of income around something that you are passionate about. Simply nothing beats it. Also, once your business starts generating a good deal of money, then you can keep dollar cost averaging into the indices mentioned above.

Dollar Cost Averaging

As mentioned above, dollar cost average is an excellent way to steadily grow your wealth. Dollar cost averaging involves investing the same amount of money into an index each month or so. The idea here is that when the market is going up, your money is buying fewer shares, and while the market declines, your money buys more shares. This concept is likely to increase your wealth vs. only investing at certain times. This is because timing the market is very difficult. If you save your cash and then invest it all at the wrong time, and markets crash, it could really hurt you so this process hedges that risk, and is definitely a process you would be smart to follow.

The best book ever written on investing (Warren Buffets swears by it!) is The Intelligent Investor by Benjamin Graham. I am on my second time reading it and recommend it for anyone looking to invest.

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)

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