One of the most mentioned and used ways of investing within the FIRE community is investing in index funds. An index fund is an investment fund that aims to achieve the same return as a particular stock market index. This is simple making it less risky than active investing. And it is cheap, which means it yields more returns than active investing. There are many different types of index funds, also known as ETFs (Exchange Traded Funds), Passive Funds and Trackers.
Why invest in index funds?
Not everyone is called Warren Buffet (a well known and respected investor) and can beat the stock market index. The majority of professional investors cannot beat the stock market index over a longer period of time. It is not without reason that Warren Buffet advices to follow the index.
Most investors, both institutional and individual, will find that the best way to own common stocks (shares’) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.Warren Buffet
The main benefits of index investing are:
Because you simply follow the index, you do not have to delve into the companies behind the shares yourself. You can set a monthly investment and let the market do the work.
- A good return
Decades of independent research and experience have convincingly shown that index investing delivers the best investment results. This is even better than most actively managed investment funds, asset managers and private individuals who invest themselves. In developed and emerging markets.
- Less risk
When investing in an index fund, you invest in a large number of companies at once, which significantly reduces the risk of losing a lot of money in one go. Some companies are declining in value and others are rising. Since your investment follows the entire market (or large part) of it, this is a safer way to invest.
- Lower costs
Because an index fund is passively managed and simply tracks the index, it entails significantly lower management costs compared to actively managed funds.
Which index funds?
Now that we are convinced of investing in index funds for the long term, we have yet to choose which funds it will be. Within the FIRE community you see that the choice is mainly for the funds that follow the total market as much as possible with low costs, namely:
- Vanguard World
The Vanguard World Fund, aka: Vanguard FTSE All-World UCITS ETF (ISIN: IE00B3RBWM25) is a popular index fund that tracks most of the world market. This fund can be purchased through DeGiro. The disadvantage of this fund is that it contains a dividend leak of about 0.3%.
- Northern Trust World and Emerging Markets
As an alternative to the Vanguard FTSE All-World UCITS ETF, the Dutch can choose a combination of two funds to get comparable coverage without dividend leakage. These are the 75% Northern Trust World Custom ESG Equity Index (ISIN: NL0011225305) in combination with Northern Trust Emerging Markets Custom ESG Equity Index (ISIN: NL0011515424). This in the ratio 88% NT World and 12% NT EM. The NT Funds can be purchased through major banks such as ABN AMRO and ING. You can find more details and compare the costs of the different index funds on the site https://www.indexfondsengegevens.nl/.
Which of the two options you choose depends mainly on personal preference. We go for the large bank option because we have more confidence in this and at the moment already in banking. Do you have a clear preference or other good alternatives? Let us know by leaving a comment!