Passive Income: Investing In Index Funds For Beginners

If you have no clue what an index fund is or how to invest in one, in this post, I answer 7 questions that briefly cover all you need to know to start investing.

Let me begin by saying that investing in the stock market is one of the topics I have been avoiding to get into (there’s a list of them) because of how intimidating it felt. I had absolutely no clue what to do with this and every time I try to read about it, I get a headache!

However, eventually, I reached a dead end because I couldn’t find another topic for this week. And I figured I’ll have to get into this eventually if I wanted to properly create a diversified investment portfolio.

If you look at any established investor, you will find that they have to have money in the stock market, one way or another.

Diversification is a protection against ignorance.

Warren Buffett

But since I am a beginner, I’m not going to jump in and start buying individual stocks all by myself, then cross my fingers and hope for the best. I figured I should start with the beginner’s level for stock investments: Index Funds.

Investing in index funds is the easy and safer route to take if you want to invest in the stock market but lack the experience and knowledge it takes, or if you simply don’t feel like taking the risk.

And it seemed like the second best investment to get into after real estate for me. So I decided to look more into this as someone who has never been anywhere near the world of stock market.

If you too have no idea how to start in this kind of investment and maybe considering giving it a try, then this post is for you.


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What are index funds?

An index fund is a type of mutual funds, it is like a collection of funds that follow the performance of a number of different markets/companies, packaged together into a single fund called an index fund.

So, instead of making a choice and buying a fund in individual stock (which requires a great knowledge of that specific stock and its chances of rising or falling in price), you buy a bunch of them into one single fund.

This means more exposure to the stock market, however, with less risk.

Who should invest in index funds?

Anyone can invest in index funds, you don’t need to have extensive knowledge in the stock market as a whole.

You do, however, need to have some basic understanding of how this works and how to choose where to buy your index funds and which funds to buy.

The lower the price of the fund and the account expenses, the higher the profit you will make. And the more broad and diverse the stocks held by the index fund, the less likely you are to face losses.

You also need to know that investing in index funds is mostly a long term investment. Meaning that you need to be willing to hold on to that fund for a while (5-10 years and sometimes more) before you see real profits.

This is usually the long-term investment suggested for retirement, similar to retirement accounts.

What are the types of index funds?

Index funds can be classified into:

  1. Stock index funds
  2. Bond index funds
  3. Commodity index funds

In this post, I’m mainly focusing on the stock index funds. However, I briefly went over the commodity ones in both Investing In Gold (ETFs & stocks)and Investing In Real Estate (funds). You can check them out for a quick overview.

As for stock index funds, these can also be classified into a number of types:

1. Broad market index fund

This is when an index fund is following the performance of an entire market. Famous examples of such funds are ones following the performance of the S&P 500 or Dow Jones.

2. Sector index fund

This is an index fund that follows the performance/profits of a certain industry in the country, such as the banking sector, the real estate sector, or a more broad sector like technology, etc.

3. International index fund

This one is an index fund that follows a number of companies from different countries.

It does not follow the performance of the stock market of these countries, but the performance of the companies whose stocks are part of the fund.

4. Global index fund

This follows the performance of the stock market of a number of countries. This index fund has main stocks from different nations, such as the FTSE 100 for Britain or the EGX 30 for Egypt.

How to choose an index fund?

There are a few things you need to consider and decide on before you take the step and buy an index fund.

Type

First thing you need to decide which type of stock you want to follow.

Do you want to follow the global stock for multiple countries? Or would you rather go for a certain industry’s performance, like banking? Or ones that track currencies or metals, like gold and silver?

There are plenty of options, and if you are not sure which one is to choose, you should go for ones that cover a bigger and broader market.

Fees

Before you buy an index fund, you should check first what kind of fees you will need to pay.

There are commission fees that gets deducted from your profits periodically, you may need to check the percentage and see if it is low enough for you to still be making a profit.

There are also some brokers or index fund companies that charge you to create an account, you will also want to consider this charge.

One last thing is the trading charges. How much you will need to pay to buy or sell your funds (you can buy or sell an index fund at the end of the trading day only).

Broker

In most cases, you will need to buy a certain index fund through a broker or a brokerage firm. You can invest through a brokerage firm locally or go with an online broker.

It is important that you first research this broker and read what other clients have to say about their service.

You can read more about how to choose the right broker here. Or you can find out about international online brokers instead.

How much money do you need to invest in index funds?

Investing in an index fund is known for its low cost. And this is because it is basically holding all the stocks in one package instead of hiring a professional to pick the right stocks to buy. So, that leaves you with not much expenses to pay.

The price for an index fund varies based on where you are buying it from and which fund type you are going to invest in.

Some index funds has no minimum amount required to start and others can have a minimum starting amount of $2000, $3000, or more.

So you can invest with an amount anywhere between $10 and $10,000. But it goes without saying that the more money you put in, the more profit you will make along the years.

However, you can start out with a small amount and keep adding to it every few months or so. You can check this list of the cheapest index funds to buy.

If you invest in a very low cost index fund-where you don’t put the money in at one time, but average in over 10 years-you’ll do better than 90% of the people who started investing at the same time.

Warren Buffett

What are the best index funds to buy in 2019?

Since I’m no expert, I did what any beginner would do and started doing research. And I found that there are a number of index funds that are always at the top of every list of best index funds to invest in. They are mostly the ones with the lowest fees and low to moderate charge for opening an account.

This is a list of index funds that are suggested by most stock experts/advisers (in order from lowest to highest annual expense ratio).

  1. Fidelity Spartan 500 (0.015%)
  2. Schwab S&P 500 (0.02%)
  3. Schwab Total Stock Market (0.03%)
  4. Vanguard S&P 500 (0.04%)
  5. iShares Core S&P 500 (0.04%)
  6. Vanguard Total Stock Market (0.04%)
  7. Vanguard Total World Stock (0.10%)
  8. Bloomberg Barclays High Yield Bond (0.4%)

Some of these funds you can invest in from anywhere in the world; however, depending on your country, you may need to invest through a local brokerage firm and not directly through the index fund provider.

What are the available index funds in Egypt?

As one of the largest and most developed countries in the MENA region, Egypt has a huge potential for economical growth and many opportunities for investment.

If you are a resident of Egypt and want to know which funds you can invest in locally, or if you are not a resident and simply want to invest in funds in Egypt, below is a list of some of the funds you can consider:

You can also check this article out to have an idea of the top ranking funds in Egypt for this past year and how much profit each made.

Till next week, happy days!

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Investing In Gold: To Buy Or Not To Buy?

If you are not sure whether you should be putting your money in gold in 2019 or not, you will find your answer in this post.

I have always had this idea that gold was the ultimate investing option. For some reason, me and people around me have this idea that if you have money, it is wiser to not keep it as cash but convert it to gold instead.

And, at the moment, as I was looking for more money investing ways, I thought, “Gold!”

But, since I am approaching this in a serious manner and dedicating my time to finding the best investing methods, I decided not to just follow my inherited idea of how brilliant an investment this would make and actually do some research, listen to what some of the experts say, read statistics, and find actual evidence on whether or not it would be as good of an investment as I, and most people I know, think it is.

The short answer to this question is: Gold is not an investment, but yes, you should buy gold. The longer and elaborate answer would be this post.


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Why Is Gold Valuable?

Gold is currently the world’s most traded precious metal and its value goes way back to ancient history where it was used for trading in the form of gold coins.

And, nowadays, it goes into many industries; the largest would be jewelry, of course, which takes up about 50% of the gold demand. Then there’s 40% that goes into direct physical investment in gold, including gold used to create coins, medals, and gold bars. The remaining demand for gold comes from industry, for use in things such as dentistry, heat shields, and tech gadgets. 

And while gold is available in nature, it is quite difficult to extract, which is why it is considered a rare metal and a scarce asset in comparison to its demand.

Extracting gold is a very costly process, it takes many years and a lot of preparations and equipment. And because gold is usually not the only metal available in a gold mine, for example, it is mostly mixed with other metals, so unless the mining companies are certain that this mine will have enough gold supply to cover all the expenses, they wouldn’t go ahead and extract it.

Gold has other values such as the powerful nature of the metal itself that can’t be destroyed by time, water, or fire.

There is a really good article on the value of gold that lists the 5 most overlooked values, if you want to know more reasons as to why gold is such a valuable metal.

Why Should You Buy Gold?

Gold is a lot easier to liquidate than, say, a house or a piece of land. There is always a market for gold.

Something else is that gold has proven to have a strong value as an asset. For example, when the stock market fell all over the world around 2008, gold has skyrocketed in price. But while the stock market prices risen back, gold still kept its value and hasn’t fell all the way back contrary to what was predicted; it just keeps rising.

It appears that gold prices often rise in response to negative economic news or a serious drop in the stock market, unlike oil, for example. So it serves as a safe option to invest your money if you’re looking for a long-term and an almost risk-free way to save your money.

As for the case in Egypt, for instance, there was a huge rise in the price of gold around 2017 following the decision of floating the Egyptian pound as can be seen in the below graph. This has definitely created an insane profit for gold owners at that time.

And before that, between 2011 and 2013, the post-revolution time, which has seriously affected the country’s economy at the time, has also lead to a noticeable rise in gold prices.

 A graph of Gold price per gram in EGP over the years via goldprice.org
A graph showing the gold price per gram in EGP over the years (1996-2019)

Many economists and investors around the world have been predicting a possible fall that would hit the stock market soon which would be similar to the one that took place in 2008; this could mean an obvious rise in commodities such as gold. Whether they are correct in their predictions or not, I think it will certainly be wise to include gold to be a part of your investment portfolio either ways.

I’m obviously no expert, so I have no idea if gold prices are going to be moving up or down from there, but I say just go ahead and buy a little bit of it every now and then, as in gradually add it to your investments. Otherwise, you may need to consult an expert who can make such judgment calls on the best timing to make a purchase based on how they see the market now and in the near future.

You can check this website for Live Gold Price everywhere in the world. At the time of writing this post, one gram of gold costs 747.46 EGP (42.49 USD).

If you want to read a more extensive study on how gold has been performing over the years and why it is a good time to start investing in it, you may need to check out this report on the relevance of gold as a strategy asset in 2019.

How Do You Invest In Gold?

First of all, I need to make one tiny clarification: Despite using the word “investment” in this post, but as far as I can see it, storing your money in a gold bar is not an investment, it is only that, “storage.”

Gold is a way to save your money. But instead of saving it in a bank account, you decide to save it in gold, in hopes that in the case of currency inflation or some global economy crisis your money will not lose its value because it is now gold which has proven over the years that it is a valuable metal and will always be in demand by both individuals and industries.

And while you can certainly benefit from a price difference between the time you buy it and the time you decide to sell it, I’d still not call it a real investment, because first of all, a huge rise in price is not guaranteed and second, normally, if it did happen, this can take a really long time for the prices to differ to the point that you would actually make a decent profit out of it.

Now that we got this out of the way, let’s move on to the how part. There are multiple ways where you can put your money in gold.

1. Jewelry

The most common method and the easiest to find is gold jewelry. They differ in the price and value depending on their weight and purity.

However, these may not yield a decent profit because most of the time you will be paying for both the metal plus the work done on the jewelry. So, if you will buy jewelry as an investment option, you may want to check pieces of jewelry that don’t have much work done on them.

2. Bars

The second option is to buy it in the form of gold bars; these would differ in price depending on their weight. Bars of gold are recognized as at least 99.5% pure gold.

This is a better option than jewelry because there is almost no work done on the gold and therefore you are only paying for the pure metal. But it can also be a little bit harder to sell them.

3. Coins

Another way to own physical gold is to buy gold coins. These can also have other mixed metals to them but they usually have the percentage of gold they contain carved on them.

However, like jewelry, you may also be paying for the work done to create the coin shape.

4. ETFs

Investing in a gold exchange-traded fund is buying stock in a company that buys and sells gold. This way you are investing in gold without actually buying and owning it.

This one is a good method because it saves you the burden of taking care of physical gold possession, but the downside to it is that it has fees both to put an investment and periodic management fees for your account. So you will need to make sure that you are not paying too much in fees that you are not actually making enough profit.

5. Mining stocks

This is another way to put your money in gold without actually owning any physical gold. Instead of buying gold, you buy stocks in a gold mining company.

The prices of the gold mines follow the prices of the gold itself, but you also invest in the actual production of gold by a mining company.

The downside to this one is that the mining business is full of risks including possible natural disasters or a mine collapsing. So this option is probably not for everyone.

What Are the Cons to Buying Gold?

Most people who are against buying gold and even those who encourage you to buy it agree that there are some disadvantages to owning it.

1. Saving expenses

If you will be opting for options like gold bars, jewelry, or coins, no one thinks it such a good idea to keep gold simply in your closet or a drawer.

So you will probably either need to buy a safe or consider renting a safe in a bank which would offer more security, for example, but is something that will require monthly payments.

So, in the short term, it will be adding expenses instead of giving interest.

2. No interest

Gold is considered a non-yielding asset. As mentioned earlier, buying gold is merely just saving your money.

So unlike the ability to rent a house you own and making money off it, for example, you will not be getting any interests from the money you put in an asset like gold.

3. Low profits

Unless there is some global economic crisis or a huge financial turbulence like the currency inflation in Egypt that lead to huge rise in prices, gold prices are usually steady. As you can see from the earlier graph, it takes many years to start noticing a significant difference in prices.

So, gold in general is not going to make you big profits as an investment.

Conclusion

From what I have read and learned so far, gold should definitely be part of your investments for its undeniable value and as a form of security and to diversify your investment portfolio, but it shouldn’t be your main and only focus, or even a big part of it. Because that is just money put on hold. It is believed that you should invest in gold with only 5%-10% of your money and put the rest of it in other types of investments.

If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it.

Ray Dalio

Till next week, happy days!

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