025 How to Invest in Index Funds or ETFs

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Hey there, Mel Abraham here and welcome to this episode of the Affluent Entrepreneur Show. And in this episode, we're going to talk about what does it take to invest in ETFs or index funds? And what do you need to know? So stay tuned.

This is the Affluent Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom because that's what it really means to be an affluent entrepreneur.

Hey there, Mel Abraham here, and welcome to this episode of the Affluent Entrepreneur Show. In this episode, we're going to, we're going to hit on something about what does it take and what do you need to do to invest in index funds or ETFs, as they call it? This is a big popular craze. John Bogle had made it, made it popular. And so a lot of people are saying, hey, passive investing is the key. And I tend to agree with it to a point. But a lot of people have asked, what are index funds? What are ETFs, how do I invest in them? And so I want to kind of clear that up. Now note, just so we're clear, I'm not going to give you specific fund recommendations because I can't. You're not my client, so I can't give specific investment advice here. But I'm going to touch on the types of funds you might want to look at as you move forward. But I think there's something we need to think about more from the beginning before we even start down that road. And answer this question of are you gambling, are you investing or are you trading? Now you might say, what the heck is the difference? Well, let me look at it this way, GameStop, that was gambling. All those people that, that jumped into GameStop, that was gambling, that wasn't investing, that wasn't even trading. Okay. And so if you want to gamble, that's up to you. That's not the game we're going to play. What we're playing is the long term game. We're talking about building wealth, permanent wealth, sustainable wealth, wealth creation, financial independence, financial liberation. And yeah. Did some people make a lot of money in the GameStop thing? Yeah, there's a whole lot of people that lost a lot too. That's not sustainable. It's not something that you can duplicate on a regular basis. There isn't even a system behind it. So what I want to do is realize that, look, if you want to do that, that's up to you. I certainly wouldn't take all of your retirement and do that. I wouldn't even touch your retirement for doing. I'm in some speculative investments. Some people might say it's gambling, but it's such a small sliver that even if it goes to zero, although I won't be happy, I won't be devastated. Okay. And so the other thing is this idea of trading versus investing. So gambling is GameStop, GameStop or any of that type of stuff. Let's look at trading versus investing because there are two different elements and I want to show you the difference. And I'm going to jump to my iPad for those of you that are listening. You can get this graphic at the show notes. We'll put the download link in because they're different. Trading is really a job. Okay. Trading is really a job. You're on it. You gotta be going in and out of trades, you gotta be in and out of transactions. And if you're not doing transactions, you're not making money. Investing is a long term view of buy and hold. Okay, Long term view, buy and hold. What's the different characteristics? So I'm going to look at them from a little different context and try to help you start to understand what they are. And then we'll talk about ETFs and index funds more directly. But I think it's important for you to understand that we're talking about is on this side of the equation. Investing. I've done trading, I still do some trading, but it's a different mentality, it's different concepts, it's different rules and, and it's a different process. Okay? So trading, if you will, what is it? Is buying and selling based on price movements. So most of the trading is based on graphs and watching charts and doing that and saying I'm getting in and getting out based on what the chart says. Whereas investing is a buy and hold based on the stock value. A lot of times we're looking at the company, we're looking at their earnings, we're looking at their fundamentals, their balance sheet, their growth, their customers, their products. We're taking a deeper dive into what is the longevity and the sustainability of the business to make that happen. So investing is more of a longer term view. The timeline trading is typically short term, quick entry, quick exit. I mean they could literally be in and out of a stock in minutes. Okay, in minutes to as much as days and maybe a little more. But the bottom line is that you're constantly, that's why I say it's a job. You're constantly watching, watching, watching execute, watching, watching, watching execute. It's not a buy and hold, it's more of a job. Whereas your investing is a longer term, your exit is usually a long ways from the entry. We get in it and we're looking at it from, for minimum five years and beyond, but usually 10 years and beyond that we're parking it and letting it grow and go and everything. Doesn't mean we don't sell things, but it does mean that we're not looking for the quick fix, we're not looking for the quick profit to take from there. How do we get taxed on it? Trading because it's a job is going to be taxed at ordinary income rates. It's going to be taxed at the highest tax rate available at the time, unless the rules change. But currently it'll be taxed at the highest tax rate at the time. Whereas you're investing because it's long term. As long as it's, you hold it for over a year, you're subject to the long term capital gains rate, which is a maximum of 20%. Not including state. Not including state. Okay, then we look at what's the riskiness of it? Well, all of them are high due to the speed and short term. When you talk about trading, your risk is much higher because if you can't get the trade executed, you might lose that little bit of profit you're trying to take. Okay, so it's a higher risk because you're playing the volatility in the stock, the ups and downs, the movements, and if you can't catch it right, you may miss it. Whereas in a investing mindset, the risk is lower because it's a longer term duration. Look One of the stocks I happen to own happens to be Facebook. Okay. Facebook will drop 13, 19, 20 points in a day. I don't care because I'm in it for the long term. And so it may do a lot of up and down during the days and the months, but over the years it grows. So this is why the risk is lower on the longer term. Hold. What about securities? What can you buy in a trading environment? What can you buy an investing environment? Typically trading is only security, stocks and options. Okay, so you're talking about stocks of companies like Facebook or options against companies like Facebook. And options are even more risky than stocks if you don't know what you're doing. I've got a dear, dear friend who's amazing at that and really understands it and he actually teaches it. Whereas when you talk about investing, you can invest in stocks, bonds, ETFs, mutual funds, notes. I invest in oil and gas deals, all kinds of investments for the long term. So I have access to a broader base of investments that allow me to diversify my holdings and reduce my risk even further. Then you look at and say, well, what's the intent of trading versus investing? Well, the intent of trading is to get ongoing profits out of your entries and exits. In other words, I need to get in, get out and make money. Get in, get out, make money. Whereas investing, we're looking at the growth of the stock over a period of time and reinvesting any dividends and any gains out of that to further it. Okay. Then we look at the tools. On the trading side, you're going to be looking at technical analysis, moving averages, charts, all of the, the different patterns and stuff that, that they use to, to decide whether they should get in and out of the stock. Whereas on the investing side, like I said, it's, it's mostly fundamental analysis. It's looking at their earnings, looking at their ratios, looking at their growth, looking at their balance sheet, looking at their products. Then from there, if we look at. What's the strategy? What's the strategy when you're trading? Well, the strategy when you're trading is to buy low, sell high and, or short, sell it if you want, which is a whole nother game we can talk about. Whereas on the investing side, it's to buy and hold for the company's growth. We're in it for the long haul. If we're a value investor and we're buying for dividend play, there's all kinds of things. But it's long term. I'm not expecting to get out of the stock for a period of time, then what are our protections in a trading environment? You will set what we call stop losses, and we'll talk about that another time. You'll know what the stop losses are before the trade is open. You're going to know what your entry is, you're going to know what your exit is, and you know what your safety point is. A stop loss is a way for us to allow you to understand what does it take to get into a stock? And then say, I want to limit my losses. So let's say I, I buy a stock at $100, I can tell my brokerage account to say, sell this if the stock drops to $90. So I'm. My maximum loss theoretically would only be $10. So I can set it up front so when we go through that, it is a $90 sell and the most I lose is $10. That's called a stop loss. And you can do that with pretty much any of your brokerage accounts to try and protect you against, against the downswing. Whereas investing, because it's primarily buy and hold, the temporary volatility like in that Facebook stock, I'm going to hold through it. I'm just going to let it go. I'm going to hold through it. And then lastly, you know, what are the costs? Because you're using frequent transactions, there's going to be frequent charges with your trading. And especially if you're doing multiple trading, then you may not qualify for free trading. You know, trades in your brokerage account, you got to look at that. Whereas because it's buy and hold and investing, you've got limited transactions and your fees are limited, your costs are going to be far less in a investing environment than investing. All right, and so that leads us to, all right, what are ETFs, what are index funds? And why do we even want to get involved with them? So one of the things, like I said, this came out by a guy by the name of John Bogle that talked about index funds. Even Warren Buffett has said about index funds that statistics have shown that actively managed funds can't beat the market or don't typically beat the market in the long term. So if you're looking for an easier way to invest that doesn't require your constant management, your constant analysis, looking at financials all day long, then a lot of people are using ETFs and index funds, exchange traded funds is what ETF stands for, and index funds, which track indexes. In doing that, here's a couple things. Is that when we look at this, what we're really looking at is instead of buying a specific stock, you're buying a basket of stocks. You're getting a bundle of stocks all at once. So when you talk about the s and P 500, those are the top 500 stocks in the Standard Poor's index. So top 500 companies. And so when you buy that index, you're effectively buying a piece of each. All of those companies. And that gives you diversification. Think about this. When Facebook drops 20 points, I get hit by 20, you know, $20 per share that I own. That's a lot of risk. But if Facebook is just a little piece of 500 stocks, it doesn't hurt as bad. It doesn't leave as much of a mark. Here's the way I look at it, and I look at it this way. So I do a shake every morning. I have a special shake that I do every morning, and I use lemons in it. And so I use a lemon, and I will peel it. But now I get a big bag of lemons. And inevitably, what seems to happen is that one lemon starts to get moldy. Okay, one lemon starts to get moldy. The thing is that the rest of the lemons are still fine. I just take that moldy one out, and I throw it in the trash and make sure that everything else is clean. And I still have all the lemons in there except for the one that I lost. When you invest in index funds, when you invest in ETFs, that's what happens if one company goes bad. It doesn't bring everything down to zero. But if you're investing in a single stock, it can. So that's why one of the things that we want to do is that we invest in a basket of stocks. So we don't have the kind of risk we would if we just buy one stock. So you're not having to look at financials all the time. You're not just looking at one stock. You've got a bundle of stocks. And when you use ETFs or index funds, because it's passive in the sense of how it's managed, we don't. There isn't a lot of work involved. They just say, what's in the s and P500? That's what we're investing in. And they do that. The fees are far less. So the fees are much, much less, which means that there's more going into your pocket and doing it that way. So that's what we're doing in A nutshell is that we're buying a basket of stocks or a basket that has stocks to diversify our risk and to reduce our fees, reduce our, our costs on an ongoing basis. Then you look at and say, well, what's the difference between an index and an etf? Well, let's talk about what they do. They're very, very similar. Both will offer diversification, both will lower your costs, although depending on the index fund and the etf, they're not all the same. Both are strong on long term returns. ETFs and index funds, you want to invest for the long term because that's the strategy that we're dealing with is 10, 20 year strategy. Now the difference is, is that an index fund trades like a mutual fund. And how a mutual fund trades is that when you want to buy a mutual fund, you can put the trade and say, I want to buy a mutual fund at the end of the day, they execute the trade. If I want to buy a single stock, I put the trade in, I say buy this stock, it immediately trades it. But an index fund trades at the end of the day. But an ETF trades like a stock. So when I put the buy in for an etf, it trades immediately during the day, so I can trade throughout the day, which means that I know what I'm getting in and out at. Whereas on an index fund, I don't know until the day's over what I'm getting in and out of. ETFs typically have lower minimums. Some of your index funds require $5,000 or a thousand dollar minimums to get in, whereas ETFs have lower minimums. And then ETFs are typically more tax efficient. Okay, typically more tax efficient. But if you're looking for a passive way to move things in, maybe your 401k, you're, and you're not wanting to look at all kinds of financials and analyze stocks and you're not ready to play that game yet. ETFs and index funds are, are not a bad way to go. Just know that they follow the index. If the s and P500 goes down, your investment's going to go down. But we're in for the long term. Okay, we're not trading this, we're investing in this. So what are the steps that you need to go through to make this happen? And these are high level steps. And you can get more details on this as we go deeper in some of our other episodes. But I just want you to understand how easy it is to make this happen. And so when we look at this is that the first is to really look at opening a brokerage account. If you don't have a brokerage account, we can't do this. So it could be anything from TD Ameritrade, it could be Fidelity, it could be, could be E Trade, could be Schwab Vanguard. Any discounted brokerage account should give you access to index funds and ETFs. You want to get someplace where they aren't charging a lot of fees and they have a good variety of offerings with that. So make sure you have a brokerage account open. They're pretty easy open these days and you can do it online to make that happen. So that's step one. Step two is to know your objective. What is it that you're trying to do? Remember, this is all about patience and time. This is long term. Because if you look at statistically the market, the market has had negative returns. In other words, it lost money in 31% of the years. In other words, 1/3 of the time the market was down, which means that we got to be able to hold during that one third. So we can get the other 2/3 to make that happen. So this is the other reason. We want to make sure that our emotions are out of it. We want to know our objective if we're going into index funds and ETFs. It's a long term play. If you need this money within the next three to five years, it's probably not the thing you want to do because it will follow the market and the market may go down in those three to five years. And so we want to be really careful about it. Next then is to decide on the mix. Here's what I mean. Do you want just equities, in other words, stock in US based companies? Do you want exposure to international companies, emerging markets like third world countries? You can get all kinds of mixes and that changes the risk profile in there. And we haven't talked about this, but you'll want to look at your risk tolerance and your risk capacity. I'll do it on another session where we start to understand how risk plays into this. And I do it a bit in the Money Plan Challenge if you want to go there too. So understand what your mix is, what sectors. Maybe you want an index or an ETF that deals with the technology sector. I've got ETFs that are dealing in the green sector. So decide on your mix. Then you'll end up picking an index fund or an etf and decide that's the one you want. Which then leads you to step five, which is to buy it. You know, whether it's five units, 5,000 units, they may be some minimums. So you gotta be aware of the minimums. Buy the shares that you want. Look for low expenses but also look for the performance of the fund or the ETF over time. Okay then over time. Remember this is a long term play. I want you to keep buying, I want it on automatic. Keep buying shares on automatic. Every month you know you're going to dollar cost average in the fund may be up, it may be down, the ETF may be up or down. But to start out, if you're unsure where to go, what I would do is, is just do a broad market fund. You can do Vanguard's vtsax, which is the total market fund. You can do Schwab's SW TSX. You can use iShares. IWV is the ticker symbol or Wilshire 5000 is the WFIVX. There's a couple of them. Now I'm not recommending them, I'm just saying those are broad market indexes that you can look at. So you can start to look at them. Each one of these will have information online that you can get your brokerage, that you open your account. I can get you information. So you can look at it and say what's the 10 year operating history, what's the expense ratios, what are those things going on? And then keep buying. Then the last two is really about tracking your progress over the long term. Remember this is a long term view. So every month I want you to look at it, Every month I want you to track it. Every month I want you to see where it is. Not because you're going to get in and out so you can just understand it and see if your portfolio is getting weighted too much to one area. Maybe it's getting too much in the international, you want to, you want to change it a little bit. And then the last piece is this. And this is important to keep perspective is to keep a long term view. The markets will go up, the markets will go down and in an index fund or an ETF you will participate in the ups and the downs. If the downs freak you out, then your emotions are involved. If the ups excite you, then your emotions are involved. When your emotions are involved, the tendency is on the downs is to get fearful and get out and then be fearful about getting back in. When your emotions are involved and you're on the up, you get excited exuberant and all of a sudden greedy and you think that you're infallible and you get in and you keep going in when you need to think differently. And all I'm saying is that we don't allow the emotions to make the decision, we allow the logic to make the decision. So know your objective, know the fund, know the etf and then do it systematically. And then know that this is a ten plus year game, minimum five plus year game, but typically ten plus year game. And on the long term these things have done well. So that's a real high level primer on ETFs and index funds. I hope that it helps you to start looking deeper and saying, I don't know what to look for in a stock. Well, let's not look for it in stock, let's look at the broader market. Let's look at an index fund or a sector fund or something like that where you're buying a basket which is reducing your risk because you're diversifying, it's reducing your expenses because you're in a passive managed fund that follows an index and you're in it for the long term. Okay, I hope that helps you. Let me know if you have questions. Let me know if anything comes up. Send me a dm. Post it in the Affluent Entrepreneur Facebook Group and let's keep it rocking and rolling. Let's keep it moving forward. Let's give you the tools, the tactics, the strategies to change and shift your financial destiny. I appreciate you so much for being on this show with me and being a follower and if you haven't done so already, do me a favor, hit the subscribe or the follow button. Stay with me on the journey and leave me a review. Hit those stars. Leave me a review. I'm going through the reviews regularly. We read them on the air. When we read them on the air, you get a chance to do a one on one laser coaching session with me about your money, about your wealth, about your business, whatever it is. I want to be here to help. So I look forward to hearing from you and seeing you and talking to you on the next episode of the Affluent Entrepreneur show. And until then, remember, remember, always live a life that outlives you. Cheers and I'll see you soon. Bye. Thank you for listening to the Affluent Entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

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