Introduction to Index Investing

Welcome to Part 3 of the Fight Fire With FIRE Investing Guide! If you’ve been following along so far, we’ve covered two important aspects that should be considered prior to investing: your emergency fund and your debt position. As promised, we are now going to look at a form of investing that is at the same time both very simple and very effective. This strategy is called index investing, and involves structuring your portfolio around a type of investment known as an index fund. We will get into what exactly an index fund is in the next post, but for now, by way of an introduction to the strategy…

Index investing is a strategy that is usually credited to John Bogle, who founded the Vanguard Group in 1975, and who also created the world’s first index fund (offered to individual investors) around the same time. Though he was at first criticized for the concept behind the index fund, the approach gained so much traction over the ensuing decades that it forced every leading brokerage firm on the planet to introduce their own versions of index funds in order to stay competitive.

To say that the concept took off is an understatement. As of September 2019, according to a CNBC article, “U.S. stock index funds are more popular than actively managed funds for the first time ever, according to investment research firm Morningstar. As of August 31, these index funds held $4.27 trillion in assets, compared to $4.25 trillion in active funds.” Warren Buffett himself has long championed index funds, calling them “the thing that makes the most sense practically all of the time,” and going so far as to place a $1 million bet against Protégé Partners in 2007 that his chosen index fund (Vanguard’s 500 Index Fund) would outperform their chosen hedge fund; he won by a landslide, with his chosen fund outperforming the hedge fund 7.1% to 2.2%.

Warren Buffett himself has long championed index funds, calling them “the thing that makes the most sense practically all of the time.”

Throughout his life and career, John Bogle’s fundamental beliefs revolved around empowering the individual investor. He wrote several books about the mutual fund industry and index investing over his lifetime, which all had that same singular focus: to show individuals that they are entirely capable of investing their own money, and that this does not require a middleman.

It is in that same spirit that I started writing this guide. I realized a few years ago that my wife and I had a significant chunk of our income going…somewhere. We had been investing in retirement for years, but what that meant, exactly, I could not have told you. I didn’t know what kind of accounts we had, how many, the differences between them — let alone anything about the investments within those accounts. Terms like “stocks,” “bonds,” and “mutual funds” were all very murky concepts. And “murky” wasn’t exactly the way I wanted to feel about our future. So, I started reading, and was lucky enough to pick up Bogle’s The Little Book of Common Sense Investing first. This naturally led me to the work of others who had adopted this same approach; the more I learned, the more I was sold. I realized as I read that not only were these the tools that I needed to take control of — and plan for — our financial future, but that there were likely a lot of people in my life that could use this information. I started taking notes, and those notes eventually turned into this guide.

John Bogle’s fundamental beliefs revolved around empowering the individual investor. It is in that same spirit that I started writing this guide.

All that to say this: A lot of the information here comes directly from the ideas of, and books written by, John Bogle, JL Collins, Taylor Larimore, Mel Lindauer, and Michael LeBoeuf. (You can find a lot of them in my Recommended section.) What follows is my attempt to distill a lot of the information I found helpful into a guide that could be passed on to those interested in learning about index investing. It’s my hope that it will be helpful. I wrote it from atop the shoulders of those giants, and will forever be grateful for their work.

By now, I’m sure you’re wondering, “Okay, so what exactly is index investing?” Beginning in Part 4, we are going to break down the fundamentals of the approach (starting with stocks and bonds), which we’ll then use to start building your portfolio from the ground up! And if you haven’t done so already, now is a good time to print out a copy of the FFWF Investing Guide Checklist that we will use as we go through the guide.

PART 3: Introduction to Index Investing (fightfirewithfire.net)

Fight Fire With FIRE