Index Fund Investing: The Boring Path to a Million

I have never bought a single stock. I have never traded crypto. I have never put money into a friend's startup or tried to guess where the market goes next. My whole approach is index fund investing, and nothing else.

I have done three things. I have contributed to my workplace retirement plan every paycheck. I have invested only in low cost index funds. And I have left it alone.

That is the whole strategy. It will never get me invited to speak at an investing conference. But I believe index fund investing is the most reliable path to a million dollars for ordinary families. It works because it is boring. Boring means you leave it alone, and leaving it alone is how it grows.

Why index fund investing works

An index fund does not try to pick winners. It simply buys every company in a market index, such as the S&P 500 or the total US stock market. When you own one, you own a small slice of hundreds or thousands of businesses at once.

That matters because picking winners is very hard. Year after year, most professional fund managers who try to beat the market fail to do it after fees. An index fund accepts the market's return instead of fighting it, and that return has been good enough to build real wealth over long periods.

You also get built in diversification. If one company fails, it is a tiny part of what you own. Your future does not hang on any single bet.

The math of compound growth

Here is the arithmetic. Broad US stock market funds have returned roughly 7 percent a year after inflation over long stretches of history. Past returns do not promise future ones, and some years are painful. But over decades, the pattern has held.

At 7 percent, money doubles about every ten years. That comes from the rule of 72: divide 72 by your return to estimate how many years it takes to double.

Now say you invest $1,500 a month for 30 years and earn 7 percent on average. You would contribute $540,000. The account could grow to about $1.8 million. More than half of that final number is growth you never had to earn at a job.

I did not pick the right company. I did not get in early on anything. I showed up every month and let time do the arithmetic.

Fees quietly decide your outcome

The difference between a low cost index fund and an expensive one looks tiny on paper. It is not.

Take the same $1,500 a month for 30 years. At 7 percent, you end near $1.8 million. If fees drag your return down to 6 percent, you end near $1.5 million. One percentage point a year costs you about $325,000. That money goes to someone else for doing very little.

Look for the expense ratio on any fund you own. It is the yearly fee, shown as a percentage. Many broad index funds charge only a few hundredths of a percent.

Fees hide in other places too. Some advisors charge a yearly percentage of everything you hold, on top of fund costs. Some funds charge a sales load when you buy. Ask what you pay in total, in dollars, every year. If no one can give you a straight answer, that is your answer.

Why boring beats exciting

The money content machine has a problem. Boring is not shareable. A headline that says keep doing what you are doing does not get clicks. So the machine sells excitement: hot sectors, new coins, secret strategies. Most of it is noise.

The biggest risk to your plan is usually not the market. It is you, selling in a panic during a crash or chasing whatever went up last year. A boring plan protects you from yourself.

Warren Buffett once wrote in his 2013 letter to shareholders that the money he leaves for his wife should go mostly into a low cost S&P 500 index fund, with the rest in short term government bonds. One of the greatest investors alive chose the simplest strategy for the person he loves most.

Put the boring plan in the right accounts

Where you hold your index funds matters as much as which ones you buy. Tax advantaged accounts let more of your growth stay with you.

• A 401(k), 403(b) or 457(b) at work lowers your taxable income now and often comes with an employer match.
• A Roth IRA grows tax free, and qualified withdrawals in retirement are tax free too.
• A health savings account, if you have a qualifying health plan, can be invested and used tax free for medical costs.

The IRS sets contribution limits for each account every year. Start with the match, then build from there.

What to do this week

• Log in to your workplace plan and find the expense ratio of every fund you hold.
• Make sure you contribute at least enough to collect the full employer match.
• Set your contributions to happen automatically every paycheck.
• Use the compound interest calculator at investor.gov to see where your current savings could lead.
• Delete one app or unfollow one account that makes you want to trade.

The koi swims for years before the leap.

Most of the journey is just swimming.

Keep swimming.