These 3 Index Funds Will Make You Wealthy: A Drive Thru Financial Education for the Working Class
Like many up and coming young professionals, a prime aspiration is to “beat the system” and build wealth over time. This is how the rich get rich? As a first generation immigrant and the first in my immediate and extended family with 20+ cousins to attend college, I was not exposed to any financial education or blessed with a starter fund. My grandparents arrived in the United States penniless serving as manual laborers, while my parents, aunts, uncles and surroundings being working class in factories and small time businesses. The only financial advice I learned was to work and save, which I did in the inner city setting hustling from a young age.
Early Lessons and Roots in Saving
My snow shoveling, corner store grocery delivery service, and pocket change side jobs in my tween through teen years were deposited in what was then a high yield savings account (mid 1990’s, yes 8%!) with the local credit union. I still recall the joy of depositing piles of dollars and coins after completing a bank slip and placing them through the small slit between a large plexi glass divider. The teller would sneer through a muffled voice telecom “You’re well on your way”, while I was overjoyed to see the compounded interest printing in my bank savings book updating my balance. Reflecting back in those times I was thrilled to have a net $2800 in savings before heading off to college.
After completing university and landing my first entry level job the employer 401k consultants came knocking on my office door to sell the wonders of building wealth with tax deferred savings. Like most recent grads with student loans, car and rent payments this was not attractive to plow in so much cash that I could not access so I turned to growing my personal emergency savings for mini pool of funds to invest. I did however oblige to contributing the minimum to the 401k to receive the employer match to receive the “free money”, as if that is ever true, and used the rest to pay down my debts.
My Introduction to Finance
After increasing my income through several promotions and paying back most of my debts I became more serious in learning the financial system. Through networking I began learning more about the stock market and general investing concepts from higher net worth colleagues (I was fortunate enough to land scholarship tuition at an Ivy League) and the array of “professionals”. One of my university professors recommended his personal financial advisor, and of course at the time I thought this was great advice coming from a multi millionaire entrepreneur. So I placed a $10,000 deposit, nearly all of my savings with a UBS Wealth Management professional.
At that point, the market timing in hindsight was great, after the financial crisis of 2008 with the market to correcting to record lows. My advisor recommended my 25 year old self to load up on as much equity as possible and dollar cost average over time and that he would provide some advice on funds. I did what any smart play it safe investor would do, bought large US large cap stocks such as GE, DOW Chemical (then priced at $6 per share), Alcoa (Actually produced products), BP (Pre-oil spill) and some others including Goldman Sachs. I watched this portfolio grow but became tired of paying my broker $100–$150 per trade and wondered what advice I was actually receiving when my go it alone strategy was producing excellent results. Moreover, I didn’t believe the annual fee structure and transaction costs were worth it and the only advice I received was to buy or sell so the firm could make more overhead from my tiny account. They did however provide some basic guidance to a newby given that the mostly only dealt with high net worths giving basic strategies with a RothIRA and rolling dividends into an IRA etc. It was a bittersweet parting when I informed my advisor I would be transferring my accounts and opening at TD Ameritrade, which at the time was offering only $10 transaction fees. Now they are free!
My Dark Times — Chasing the Dragon
After learning to trade and transact options on my own combined with some very early gains and de-coupling from an advisor to keep myself grounded — this was a recipe for what I now call the dark ages in my financial journey. My late 20 something self with large rollover gains cashed out my returns and that little greedy demon or some call it the “urge to beat the market” took over. I read many “expert” books on the subject of strategic short term trading for profits and delved into what I consider the media driven frenzy of the financial system. This prompted me to move from basic index funds and large cap US stocks into “alternative investments” such as puts, options and commodities futures contracts. At the time I had read several books such as “If it Does Not Go Up, Don’t Buy It”, was a Jim Cramer and news info junkie, and subscribed to trader’s networks to obtain the hot tips. The best rated trading book which still is in its own right, I subscribed too was “Trade Your Way To Financial Freedom”. With some gains to spend with the house’s money and armed with my new research and low cost trading I was addicted to trying to beat the market. Between 2011 to 2014 I made over 300+ transactions betting against the broader market (very because there as a prolonged recovery with quantitative easing), Gold futures (nearly lost my entire 401k in mining stocks), Corn (Do not know why I did this, blame the books!), and various “new instruments” such as ETN notes on pipelines and even 3x short equity bear funds. In many of these I made large sums, like one day in 2013 I netted $5000 in a single trading day when finally my bets against stocks and long positions on gold went the same direction. However, that gain combined with all my losses over the this trajectory barely let me hold on to my original deposits net of fees. I reference “Chasing the Dragon”, in a 1990s movie on heroin addicts that live for the first high but keep taking more risk (while risking death) as looking back some of the large positions I took in gold futures could have wiped out my entire net worth. Something had to change, this could not be “expert” advice. I was humbled, quit this system and cashed every single stock position and remained out of the market in late 2015 until 2017. For two years it was crickets and back to what I only knew how to do, work and save like everyone else in my old neighborhood. Only this time interest was at <1% on savings, probably even less.
My Renaissance — Combining my Past with Common Sense
If you have made it this far past my previous musings, the old adages come to the forefront of my financial journey, summarizing:
- Even when market timing is good, we don’t really know it and only do so in retrospect.
- Advisors simply at best prevent you from making terrible mistakes, albeit with higher fees, but these may prevent fruitless transactions and or complete disasters
- Stop Chasing the Dragon. One cannot “beat” the market, only ride it for the long term.
- You really only need 3 very low cost ETFs to become a successful investor, the rest is noise. Read below and cancel all of your advisors, subscribers and turn off big media
Finally, my 3 recommendations for the working to middle class investors trying to invest wisely over time [i.e. at least a 20 year horizon]
Depending on your age and other factors these should be purchased with a low cost $0 transaction broker (TD Ameritrade, Charles Schwabb, InterActive Brokers). Each of these funds are broad with very low cost structures that are unbeatable in the current market.
Vanguard Total Stock Market Index ETF (Ticker: VTI)
This is the largest blended value fund in the industry, and the rate of growth with net assets over $1 Trillion proves it. Vanguard provides a simple low cost means to access every large, mid cap, and some small growth stocks into one easy transaction. Moreover it pays a 1.8% quarterly dividend. There aren’t many sure bets, but basic market dynamics has demonstrated since antiquity that buying and holding broad based equities >10+ years always nets a positive return averaging between 7–10% annually. This should be dollar cost averaged over investment lifetime and retained. For allocation, anyone aged less than 25 with no dependents can safely place 100% in this fund assuming basic emergency cash savings have been achieved first.
Vanguard Total Bond Market Index ETF (Ticker: BND)
Fixed income is boring, this recommendation even more boring, but it provides both a common sense cushion and by purchasing US treasuries, international bonds, and some light mortgage backed security bonds <10% for some additional appreciation this ETF fund consistently is deemed the best. Yielding 1.5–3% annually, bond funds are boring but grow money slowly as well as provide a cash buffer to buy up large equity drops. The rule of thumb is to place your age as a % of your holdings in this fund. If you are 25 yrs, place 25% of your total in this fund with 75% in the other two.
iShares Core US REIT ETF (Ticker: USRT)
Over time, real estate typically outperforms stocks when considering both distributions and tax advantages. Governments all over the world have largle subsidized and incentivized real estate holdings. When the super rich has excess, they place it in land and real estate speculation and growth investments. Recently, REITs or real estate investment trusts have offered the average investor means to acquire either large publicly traded real estate firms, companies and other opportunities that were limited to private big time investors. Arguably one of the best books written by a pro “A Randomn Walk Down Wall Street” advises 10–30% in real estate portfolio holdings since they provide both appreciation and stable income. The income is greater but appreciation slighly less than broad based stock pools.
Combining these 3 low cost long run winners provides growth, some income, and long term security riding the wave of the market instead of trying to beat it. There have been many articles written demonstrating how even the best money managers still cannot beat the low cost indexes. In essence I’ve learned to stop playing with the house money and just ride the casino’s flow from other people’s mistakes — i.e. there will always be dragon chasers.
My humble quote: Winning in the short term is an illusion discounted by the long term, focus on buying small in the now and let it build over time.
Hope you enjoyed this read and more to follow on my channel.
