Investing Your Way to Financial Freedom

By: Ionatan Wolfson  |  August 31, 2020
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By Ionatan Wolfson, Business Editor

Everyone, especially during these trying times, wants to build capital and create some sense of financial security. What many people fail to understand is that the easiest, surest way to make money has been around long before COVID-19. I am not referring to investing short term in single company stocks. I am referring to investing in the entire market. To make money, reducing risk is the name of the game. People do this by diversifying their portfolio: i.e. buying smaller amounts of many different assets as opposed to going all in on one asset. The S&P 500 index fund holds large positions in the top 500 publicly traded companies. Therefore it is the best representation of how the market is behaving. Investing in this fund is one of the best ways to diversify. You are basically buying into an already diversified portfolio. This option, both safe and effective, is one of the best ways of growing your money. Warren Buffett, largely regarded as one of the smartest modern investors and dubbed “The Oracle of Omaha,” strongly advises to invest in a low-cost index fund such as the S&P 500 index fund and hold it for the long term. You do not even need thousands of dollars to begin. With the increasing abundance of fractional shares among brokers, investments can be made with as little as $1. Investing, as unfamiliar as is it may be to the average person, is one the easiest way to build long term capital. 

There are a few reasons for why people like to invest in an S&P 500 index fund as opposed to single company stocks. Firstly, there are many requirements a company must fulfill in order to be added and to stay part of the S&P 500. Companies can be added or removed at any time. In general, companies must make money to survive, let alone stay in the S&P 500. And, if there is no profit, investors will be scared away. Additionally, getting added into the S&P 500 is a big honor for a company. It means they have joined the elites. Historically, share value rises after announcement of being added to the S&P 500. S&P 500 index fund managers then must buy stock in the newly added company. All of this means more demand and investors. That, in turn, pushes the stock’s share price even higher. Therefore, it is in the best interest of a company to get added and stay in the fund.

Additionally, since the inception of the S&P 500 in the 1920s through 2019, it has had an annual return of about 10%. The incredibly impressive return rate is not the only attractive point of this investment. The real magic is letting money sit and allow for it to compound over time. If someone invests $100 in an S&P 500 index fund and then invests just $10 a month and then lets it grow for 30 years, that investment would on average become 21,484.22$. Obviously, as with any investment, you should know there is risk involved. But holding long term in a diversified portfolio will lessen the risk.

Unlike short term investors, long term diversified investors do not have to worry about the market having bad days. They are looking twenty years down the line. They’re also not worried about one stock tanking because they could have many other positions that are doing better. Investing long term in an S&P 500 index fund could potentially be the key to financial freedom.

 

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