Investing in index funds is a great way to invest your long term savings. There is always a lot of debate among investors about whether you should invest in individual stocks, no-load mutual funds, closed mutual funds or index funds. Me personally, I love investing in index funds.
Index funds offer a lot of advantages for investors. My favorite things about index funds are their,
- low management fees
- ability to diversify my investments by investing in only one mutual fund
- good mutual fund performance averages versus other types of mutual funds
All things considered, I think they are a great way to invest in mutual funds.
Mike from The Oblivious Investor today released a free ebook titled Investing Made Simple: Investing in Index Funds in 100 Pages Or Less. I immediately downloaded it and took a skim through it. I looks like Mike has written a great primer for anyone wanting to learn how to simplify their investments. Mike goes over the basics of investing as well as the basics of investing in index funds. I definitely recommend that you check out Mike's free ebook on investing.
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{ 10 comments… read them below or add one }
Hi DebtHawk.
Thanks for spreading the word about the new book.
I hope your readers find it helpful!
I fail to see the wisdom in investing unless a person is already debt free.
Investments always carry risk, but paying off debt does not. Unless the investment is %100 a sure thing (which I have never found), and pays off at a higher rate than the interest on a person’s debts; the best use of the money is to pay off or pay down the highest interest debt first.
Paying $1000 toward a debt with a 30% interest rate is the same as making 30% on a $1000 investment, plus its tax free.
W G Peters: I’m inclined to agree with you. A risk-free, tax-free 30% return on your money is darned hard to beat. Pretty much the only thing I’d even consider doing before paying off debt at a 30% interest rate is taking advantage of a dollar-for-dollar employer 401(k) match.
For reference, the book is intended for people who are either finished paying off high-interest debt, or close enough to that point that they’re ready to start learning about the next step toward their financial goals.
If I was carrying debt accruing interest at 30% I would pay that off before investing. Go get a second job at night and work your tail off to pay that one down.
I think that people should always take advantage of an employer 401(k) match. I would hate to leave that money on the table.
One trick I like to use is to increase your 401(k) contribution with any raise you get at work. This is a great way to painlessly increase your contribution at to the limit of your employer match.
Mike,
Even 401Ks and IRAs are a risk. I have lost money and wealth on every retirement plan I took part in, including the ones where my employer contributed. Debt repayment is a sure thing. If the economy was on an upswing I might agree about the 401K, but not now.
If you investment horizon is long enough and you are properly diversified, investing in a 401k or other retirement account is a great way to invest. However, if you have any debt at 8% or over, I agree that you should pay that off first.
W G Peters: Most 401(k) plans that I’ve seen have a low-risk or no-risk option (i.e., a money market account).
Also, if you were to invest in stock funds in your 401(k), even with poor market returns, the instant 100% match makes for an ROI that’s likely better than that earned from paying off debt–even high interest debt.
That said, if you’re dead set on not investing until your debt is paid off, then that’s fine. Nobody’s going to tell you that a 30% risk-free, tax-free option is a bad choice.
Mike,
What you say may be true in terms of dollars but not in terms of wealth. When inflation is figured in, I have lost on every form of investment.
Remember, money is not wealth, and the goal should be to increase our wealth, not inflated dollars.
I am debt free, but I would be a lot wealthier had I completely shunned 401Ks and IRAs in general.
Err, inflation comes out of an interest rate too.
To stick with the 30% interest rate, if inflation is 3%, then that means that the inflation-adjusted interest rate (and thus the ROI you’d be earning by paying off the debt) is only 27%.
Same thing with a 401k match. Instead of an instant 100% return it’s an instant 97% return.
If anything, that seems to me to be an argument in favor of the 401k match. (Because inflation only takes away 3/100ths of the return rather than 1/10th of it.)
Mike,
The DJIA peaked out around the year 2000, and has lost half of its real value since then. For a lot of people, that means that even with matching funds, their real rate of return is pretty dismal.
The bottom line is that any investment is a risk, while paying off debt is not. Just ask the millions of people who have lost most of their retirement funds in this depression, and still have a mortgage to service.
Once a person has paid off their debt, and has spare change in their pockets, then investment may be a good choice. Not before.