Investing is often seen as a game for financial wizards, a complex maze that only the well-versed can navigate. But what if I told you there's an investment strategy that even the most inexperienced can take advantage of: Index funds?
What is an index fund? Just like a buffet at a popular restaurant, instead of choosing just one dish (or stock), you get a little bit of everything on offer. This means you enjoy a taste of all the best recipes, regardless of which cuisine (or company) is the flavour of the month. It's a diversified approach that allows you to enjoy the full range without relying on a single choice.
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The other night, I had an eye-opening conversation with one of my content creators. I introduced him to the world of index funds, explaining the historical returns and the power of compounding over 20+ years. His reaction? Pure astonishment.
"If it’s so easy, why doesn't everyone do this?" he asked, bewildered. It’s a good question.
Why isn’t everyone doing it?
There are several reasons. Perhaps some people lack understanding, maybe others prefer the thrill and risk of attempting to get higher returns, or maybe it's down to personal beliefs, financial goals, risk tolerance or economic factors.
Sometimes, even the perception of the simplicity of index funds might be a deterrent.
So, why should I invest in index funds?
1. Simplicity and accessibility
Index funds offer a simple, accessible way to invest. You can enjoy the top 100 stocks without picking and choosing. It's a laid-back yet effective approach, with returns that can be surprisingly rewarding.
2. The magic of compounding
With the right approach, even small investments can grow significantly over time. Consider the S&P/ASX 200, one of Australia's benchmark indices, delivering an average annual return of about 8.1 per cent over the past 20 years. Here are some fun scenarios to help visualise the returns:
Scenario 1: Invest $20,000 in an index fund with an average return of 8 per cent. Invest $1,000 a month into your portfolio. In 20 years, that turns into $600,000+
Scenario 2: Let’s up the initial investment to $100,000. In 20 years, you would have more than $1 million.
These examples showcase the incredible growth potential of a small initial investment.
3. It’s more favourable during economic uncertainty
Investing during times of economic uncertainty might seem counterintuitive, but index funds are built to weather the storm. Diversification provides a cushion, distributing risk across various sectors. Instead of placing all your eggs in one basket, index funds spread them out, giving a sense of stability.
During volatility, traditional investment avenues may fall, but a well-structured index fund adapts and survives. It's about playing the long game, maintaining your position, and enjoying the consistent growth that can outrun inflation.
“We try to always stay fully invested during a downturn,” hosts of the QAV investing podcast said.
"Historically, the biggest single positive days in the market have come when a downturn bounces back, but you can never predict when those will happen. If you miss out on those days, you can miss half of the upside for an entire cycle.
The youthful advantage: Gen-Z perspective
As a part of the youthful Gen Z, I can attest to the importance of starting early. Economic uncertainty doesn't have to be a barrier. It can be an opportunity. The power of compound interest is even more powerful using our best weapon, time.
Time is on our side and, despite economic noise, a strategy focusing on index funds can turn uncertainty into an advantage. Embrace the fluctuations, learn the art of patience, and let your investments grow.
In our fast-paced, ever-changing world, economic uncertainty is a reality we must all face. But instead of fearing it, why not embrace it as an opportunity? The powerful magic of compounding, the simplicity and stability of index funds, and the youthful energy of starting early are all within reach.
My conversation with my creator revealed a truth many overlook: sometimes you don’t need to be smart to invest, you just need to have patience.