Day Three - Index Investing

You're still here.

Yay.

Okay, today I'm going to talk about index investing, which is the strategy that I had been struggling with.

What to invest in, how to invest, being like quite scared about losing money, which you know, we have, we as humans have loss aversion.

We really don't like the thought of losing money.

And that can keep us very paralyzed and stuck.

So when I found out about index investing, I was like, this makes so much sense to me.

And basically what that means is so an index basically means you're tracking something.

So we have stuff like retail price index, which is tracking the cost of things.

this context we're going through here.

We're talking about investing in the stock market, which is putting our money into stocks and shares.

And what that means is we are buying tiny pieces of companies.

That's what a stock is like.

we buy a little bit of a company.

So when the company makes profit because we own a bit of it, we get a bit of their profits too.

And then if the company grows and goes up in value, that's also how we make money.

So we want to be buying these tiny bits of companies, right, because they grow and they make money.

And the stock market is this kind of catch all phrase for all the companies that are available for the general public to buy.

Because you know, there are lots of companies out there, like your corner shop, we couldn't buy a little piece of that, that company.

But there are, publicly listed companies, you know, like the big ones like Apple, Microsoft and others that you probably wouldn't have heard of that we can buy little pieces of.

And they're listed on the stock market, which makes sense, right?

If we think about a market, a market is where we go to buy stuff.

So the stock market is where we go to buy stocks, these pieces of companies.

So these indexes.

Let's rewind to the index.

What they do is track a stock market.

And we have different stock markets for different geographies and regions.

So the US stock market is called the S P5 500.

So those are the 500 biggest companies that are registered in the US listed on the US stock market.

Then we have stuff like the FTSE 100, the hundred biggest companies in the UK, and then we have world indexes that basically track every single company in the world across all the countries that we could be invested in.

And if we kind of look at how all those have done over the last 30 years, they've all together kind grown about 8% every year.

So that's where I got that number, that benchmark from, that you might have practiced playing in your calculator from being like, what happens if it did make M8% every year?

How does that roll up?

Get the compound interest?

Over time you would have noticed that if you put in over like 10 years, it would have made a lot less than if you put in over 30 years, how So if we want to invest and use this index investing strategy, what we're going to do is buy an index fund or an index tracking etf.

Just bear with me on the jargon.

That's they're basically kind of bundles of companies.

So when you buy into these funds, they will bundle all these bits of companies together for you, so that instead of you having to go out and buy a little piece, every single one of these hundreds of thousands of companies, it's all put together one place for you.

Kind of like a bouquet of flowers.

Instead of me going out and sourcing every single stem, I can just buy a bouquet.

It's done for me.

That's a fund.

So it's going to pull together all of these little pieces of companies for us.

They can track different geographies.

So some of them might track America, some might track the world, some might track the uk, some might track Japan.

So there's lots of different types of them, but essentially the way that these work is that they work algorithmically.

So if a company is increasing in size, the amount of money you will have in that company increases as well.

So it's all proportional.

So your money will be put in across whatever range of companies you pick, depending on the geography, depending on the index you're tracking and the kind of amount that's going in each company is constantly changing.

It's always fluctuating based on the size of the company.

And what that means is that, say a company isn't doing that well and it's shrinking in size, the amount of your money proportionally in that company will also be shrinking in size equally.

If a company is growing, that means the proportion of your money in that company will grow as well.

So that's how you know you don't have to pick winners or be like, what's the next Apple?

I've got to find and put my money in that.

No, this index fund is just going to do that for you.

If there's a company that's a bit smaller and they're growing and growing and growing, the amount of money you have in them will grow and grow and grow proportionately.

So you don't have to do anything, you just have to pick the right fund, put it in, and then that kind of algorithm will be managing it the whole time based on the company's size.

So you just need to pick the index you want to track, pick the geography you want, understand that it's for the long game, have an idea on how much you might make every year.

know that it's going to go up and down and that is how it works.

So you don't have to be kind of doing loads of research and guessing what's going to happen with companies.

You just pick the one fund up front, set it and forget it, leave it to do it's thing.

And the reason this works so well is that we are diversified, which basically means we're spreading our money out across loads of different companies.

Because imagine if like back in the day I put all my money into Blockbuster.

I would probably be sitting here right now, like shouldn't have done that.

So it's quite risky putting all of our money into one company.

And what these funds do for us is they spread that risk.

Because if a couple companies fail, which they will, that's how things work.

We've got got loads of others that we're also invested in.

And also, like I was saying, as things as a company is deteriorating over time, we're automatically moving money out of them anyway and putting it into the companies that are growing.

So that is how we kind of make things a bit less risky for ourselves.

A bit less needing loads of technical analysis.

so that is a top line insight into the indexed investing methodology.

As much as I can do in a short snappy video.

I hope that's given you a lot to think about.

next up, I'm talking about the ethical side of investing.

Kind aligning our money with our values and how we invest and how that fits into this index investing strategy.