Own the world?! Some mistake, surely? After all, we’re only here to reach Financial Independence! We’ve no business trying to own the world, right? Wrong! Two words for you: index funds. If you don’t know what I’m on about, this post is for you. Bear with me, and I promise all will be clear.
But first, let’s talk about the basics of investing in the stock market. When it comes to investing, a lot of people are scared. At best, stocks are often viewed as a socially acceptable cousin of gambling.
That’s quite understandable. Just like putting it all on black in roulette, shares in a single company can leave you with double or nothing in a short space of time. Just ask anyone who bought Enron shares in the late 1990s. All of this makes the stock market seem a real emotional roller-coaster.
Let’s be honest. Investing is risky, and it will never feel 100% comfortable. But we’re about to learn a strategy to smooth out the roller-coaster. To do so, let’s go back to kindergarten. We were all taught this proverb as kids:
Don’t put all your eggs in one basket.
I’m sure most of us follow that advice without even thinking about it a lot of the time. When we look for work, most of us submit many applications rather than just putting in one and crossing our fingers. It turns out “don’t put all your eggs in one basket” is pretty sound investing advice too.
Whilst individual shares can be exceptionally volatile, big groups of shares across large numbers of companies tend to be less so. Why? Because when one company goes down, another will probably go up, balancing things out.
Here’s where “owning the world” comes in. If we could just own a bit of every company in the world, we’d be insulated from the fortunes of any single company, or even country. Instead, we’d just take a slice of the overall pie of global growth. Obviously there are times when the global economy as a whole takes a dip. On the other hand, if the whole global economy ever goes the way of Enron we’ll be too busy worrying about other stuff in the armageddon to even notice.
I hope we can agree that owning the world is a solid theory. But in practice it sounds like a lot of hard work, doesn’t it? Can you imagine how long it would take to buy shares across the whole world? Here’s the lucky bit: someone already did it for us. We can invest in a whole bunch of shares – getting the benefit of global diversification – through vehicles known as global index funds.
We’ve got options on specifics. The biggest game in town for index funds is Vanguard. Even Warren Buffett – the most famous stock investor in history – wants his wife to put their wealth in Vanguard funds when he dies. I’m not here to sell any particular option. If it’s good enough for Warren Buffett, though, it’s certainly good enough for me!
What are your main concerns about investing? Have you already started? Would you consider global index funds?