Invest Your Retirement (401k as well as Roth) Savings Into Index Funds

retirement savings
index funds
401k optimizer
Co-Authored and Reviewed by Gagan Sandhu, MBA - The University of Chicago Booth School of Business, CEO of Xillion
Posted on . 3 min read

Author: Gagan

Until last year, I invested all my retirement (401k as well as Roth) savings into two index funds: 50% in Vanguard S&P 500 index fund; 50% in Vanguard Russell 2000 index fund. The thought process was simple but saved me lot of money and anguish. By spending less than 10 minutes, you can also save tens of thousands of dollars by following a few simple steps listed here.

Why these particular categories of funds?

S&P 500 represents American economy really well and captures all the great business of today. Russell 2000 index represents all the small companies that are likely to become great big businesses in the next 5-10 years. I learnt in business school that investing in small cap companies (index) is almost the 8th wonder in the world where you get extra returns, without any extra risk!

Why these particular funds?

These funds had the lowest expense ratios. In a retirement/401k plan, choices are limited by the employer and the plan administrator (Fidelity, Vanguard etc). And I always picked the funds that had the lowest expense ratios. A S&P 500 index fund with 0.1% expense ratio is 500% cheaper than another S&P 500 index fund with 0.6% expense ratio! Yet, they both will have same returns as the S&P 500.

I never invested in bonds because I wanted to higher growth rate, which inevitably comes with higher volatility. But I was okay with volatility because I do not need the money for another 20+ years.

Why not invest in timed funds like Fidelity Freedom 2040 etc?

These types of funds are too opaque, and their expense ratios are way too high. Here's an example. Fidelity S&P 500 index fund has a really low expense ratio of 0.015%. Fidelity Freedom 2040 fund has an expense ratio of 0.75%, which is 50 times the S&P 500 fund!) but it's returns are much worse than the other fund. In this case, Fidelity does 50 times better if you choose the Freedom funds as compared to the regular index funds.

Why not invest in international stocks?

US offers such a broad spectrum of investment options with great returns that I did not believe it was worth my time to pursue opportunities elsewhere. Plus, I have deep faith in the dynamism and robustness of the US economy in the long run.

Next steps?

Go to your retirement account, look at the investments that you have. If they are funds, look at their returns and expense ratios. To save time and hassle, just pick the S&P 500 Index fund with the lowest expense ratio. And one small cap fund with the lowest expense ratio.

If this was helpful, please like, comment and share. And see the comments for links to actual data and other useful resources.



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