Today, one the road to wealth, we look at what an index is:
But, first, who says investing is better than speculating?
Well, Warren Buffett to name just one of many. He is one of the most successful investors in the world.
He started his first business with a pinball machine when he was 15 years old. Now, he has collected a $85.6 billion fortune. That’s so much money, it’s hard to picture it.
No. More than this. That’s enough money to buy a few islands…
Disneyland, DisneyWorld, and still have more money than an entire country’s worth of people.
Still, even Warren Buffett does not claim to know what will change market prices in the short-term. He does not recommend speculating, unless you don’t mind losing more than you gain.
So what’s the shortcut? How can you invest wisely without knowing all about the business you are buying?
This leads us back to a promise made in the very first post of Cashtoons:
- If you do not want to think about your money, you are perfectly suited to some of the most reliable ways to invest (have your money make more money).
Instead of focusing on one company,
You buy stock in many companies.
Buying some of just one company, no matter how strong,
means putting all your eggs in one basket.
Even the strongest companies can sometimes fail, which means your one basket could take a tumble, risking everything.
Buying small slices of many companies spreads out the risk.
One company may go out of business,
But you still have many other investments safely nestled in their own baskets. This evens things out. You may not win big, but you won’t lose big either.
Like an index at the back of a book that lists many of the topics in the book, the same word is used for a list of businesses for sale in the stock market.
One example is the Standard & Poor’s 500 Index, which lists the biggest 500 companies in the United States.
Instead of choosing companies to invest in, you can put your money in an index fund, which combines stock from so many different companies, it will go up and down with the waves of the market.
You are like kelp. Riding the waves. You never do better than the market, but you don’t do worse either.
Index funds are not exciting or flashy. You aren’t rising above the rest, but you are winning. Tune in next week to find out how.