Tea Time English: August 26

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Index Funds for Teen Investors (and Kids)

Index funds may be the perfect investment for teen investors who don't have the time or the knowledge base to choose stocks for their portfolios.

An index fund is a type of fund that includes a bunch of stocks that try to mimic the stocks in a market index that represents the broad investment market.

(インデックスファンド:市場の動きを示す特定の指数と同じ値動きをするように運用される投資信託)

For example, a popular index fund is the Vanguard 500 Index Fund, which tracks the stocks in the Standard and Poor’s 500, an index of the 500 biggest companies in the United States. Other index funds represent the broad stock market. However, for teen investing, you should stick to the most prominent index funds that represent diverse stock holdings, like those in the Standard and Poor’s 500 Index, the Dow Jones Industrial Average, and the NASDAQ.

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One of the most important reasons for teens to invest in an index fund is because of something called diversification　分散. Diversification is investing in several different stocks (for example, stocks in various industries) so that a decline in the value of one stock does not necessarily affect the value of the other stock in your portfolio. A broad market index fund hold so many different stocks that a decline in the value of any one stock will not affect the value of the other stocks in the fund. For this reason, teen investors would come to appreciate that index funds are less risky than investing in the stocks of one or two companies.

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As a simple example, let’s suppose you bought Amazon stock on July 8, 2021 at its closing price of about $186.57 (the price it was selling for that day). By December 14, 2022, the stock was down to $91.58 – a 51% decline in value.

By contrast, let’s suppose you bought the Vanguard 500 Index Fund (which relates to the Standard and Poor’s 500 index) on July 8, 2021 at its closing price of about $388.82. By December 14, 2022, the fund price was down to $367.16 – a mere 6% decline in value.

To summarize, Amazon’s stock declined by about 51% between July 8, 2021 and December 15, 2022 but the Vanguard 500 Index only declined by 6% in the same period. As you can see, buying an index fund based on a broad market index can protect you against significant declines in the value of your investments.

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There are two types of funds: mutual funds(投資信託)　and exchange-traded funds(ETF). They are very similar but a mutual fund's share is generally traded once a day, unlike stocks which are traded continuously throughout the day. An exchange-traded fund trades just like stocks.

ETFは上場している：価格を見ながらリアルタイムに売買できる

投資信託は非上場：1日1回の決まった価格で売買する

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As I previously discussed, a teen investor should stick to index-based ETFs only. The broad market indexes in the United States for which you can find ETFs are as follows:

The Standard and Poor’s 500 Index (S&P500) – as I have already described, this index represents the price of the top 500 companies in the United States.
The Dow Jones Industrial Average – this index is also considered a broad market index for stocks in the United States; it is the oldest stock in the United States and consists of the stock of 30 large companies.
The NASDAQ – this index is a broad market index that primarily represents movements in the value of high-tech stocks.

Each of these indexes has associated ETFs. Some of the most popular of these include the following:

Vanguard 500 Index Fund (Standard and Poor’s 500 Index ETF; Symbol: VOO).
SPDR Dow Jones Industrial Average ETF Trust (Dow Jones Industrial Average Index; Symbol: DIA)
Invesco QQQ Trust (NASDAQ Index; Symbol: QQQ)

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Not all ETFs are created equally. One important thing a teen investor should consider when investing in any ETF is its expense ratio (運用管理費用（信託報酬）や購入時、保有時、配当・分配時、売却時に費用かかる) Each ETF must be managed by investment advisors who decide what stocks to include in its portfolio. This expense ratio covers the cost of the investment advisors and managers.

For broad index-based ETFs (such as those that track the Standard and Poor’s 500 Index), the expenses are pretty low since all a manager has to do is include the stocks in the index in the ETF pool. So for broad-market index funds, expense ratios are relatively low because they require less attention.

For example, the expense ratios for Vanguard 500 Index Fund, SPDR Dow Jones Industrial Average ETF Trust, and Invesco QQQ Trust are 0.03%, 0.16%, and 0.20%, respectively. There are the hidden costs you are paying for investing in these funds. The cost of the Vanguard 500 Index Fund is particularly low because Vanguard is known for keeping costs low for its clients. The other two ETFs are also low compared to the exorbitant amounts charged by other ETFs.

By way of comparison, an ETF related to financials called the Invesco KBW High Dividend Yield Financial ETF (symbol: KBWD) has an expense ratio of 2.59%. This is criminally high and it means that over a long period of time, you will be burning money just for the privilege of have expensive investment managers manage your ETF.

This is precisely why teen investors should stick to ETFs related to simple broad market indexes like the Standard and Poor 500 Index or the Dow Jones Industrial Average. There are no special skills for investment managers to maintain these ETFs so they are much cheaper for you, and you will benefit in the long run.

東証ETFガイドブック

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Ramit Sethi -I will teach you how to be rich-

https://www.iwillteachyoutoberich.com/etf-vs-mutual-fund/

https://www.iwillteachyoutoberich.com/how-to-invest-in-index-funds/

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