Index Fund Investing 101

INDEX FUND
INVESTING 101
THE BEGINNERS GUIDE TO

INDEX FUND INVESTING
BY SEAN CRANSTON
AKA THE WEALTH DAD

CONTENTS
1
F O
INTRODUCTION
4 WHAT'S A STOCK
E L B A T
MARKET INDEX?
8 THE ALMIGHTY INDEX

FUND
21 ACTIVELY MANAGED
MUTUAL FUNDS
27 INVESTMENT ACCOUNTS
36 TIME IN THE MARKET
44 COST OF FEES
51 TARGET DATE RETIREMENT

FUNDS
56 DAVE RAMSEY PORTFOLIO
63 DAVID SWENSEN PORTFOLIO
69 3-FUND PORTFOLIO
74 PORTFOLIO REBALANCING
82 SAFE WITHDRAWAL RATES
90 INTERNATIONAL INVESTOR RESOURCES
96 FURTHER RECOMMENDED READINGS

Introduction
Welcome to Index Funds Investing 101!

Thank you very much for choosing this book as a resource for your
learning, in regards to the basics of stock market investing using low-
cost index funds.

Before progressing in the book, I wanted to make it very clear up front
the target audience that this book is written for. For those of you who are
already well versed in the stock market and how it operates, this may
simply serve as a refresher for you, or potentially another way to invest in
the stock market.

The content within this e-book will primarily benefit those with little to
zero previous stock market knowledge. If you have been wondering
about the stock market or investing for some time now, then this book
will serve you well as a beginning guide on how to successfully invest in
the stock market using low-cost index funds.

5 years ago, I was completely ignorant with my finances. I was a young
college graduate who was just starting his adult life in the real world, and
had absolutely no money knowledge. One day, one of my bosses at my
first “big boy” job sat me down and told me one of the most important
lines I still remember to this day:
“Kid...above all else, take care of your retirement

FIRST.”

At 22, those words didn't hold much weight in my head when I first heard
them. Slowly but surely though, over months, I began to wonder about
my own money. That led me to begin reading every money/investing
1
Introduction
book that I could find on Amazon. After reading voraciously on everything

money, investing, and stock market related that I could, I came to one
simple conclusion:
The easiest way that I (and the common person) can successfully build
wealth is by investing in low-cost index funds. Index funds are never going
to be the sexiest investment on the block. Over the long-term though, they
can build generational wealth for those who are patient enough to
consistently invest in them, and hold those investments for decades
without selling.

Once I saw how easy and simple it was to build wealth by using index
funds, I wanted to share this knowledge with everyone I knew, so that they
could benefit from the knowledge too. This book is the result of that
knowledge sharing goal of mine, and I hope the knowledge you gain from
the pages ahead will benefit you and your family moving forward, just as it
has greatly benefited mine!

This book is also written from the perspective of an American investor.
Many of the accounts/funds mentioned in the pages ahead are United
States specific, but the principles are universal. Many of the essential
concepts can be applied to citizens living abroad.
Throughout this book, I will routinely recommend Vanguard as my

recommended brokerage of choice. They are continuing to offer their
services and low-cost funds to investors world wide, so international
investors can also benefit! I will also list other brokerages for international
countries at the end of the book, in the event Vanguard doesn't currently
service your country.
With all that being said, I thank you again for trusting me in helping
you build generational wealth for your family using low-cost index funds!
2
Chapter
What's A Stock Market

Index?
Stock Market Index 1
Before we can begin to comprehend what exactly a stock index fund is,
we first must understand what a stock market index is.

A stock market index is a collection of stocks that represent either a
stock market at whole, or a smaller segment(s) of a stock market. Have
you ever heard in passing, someone or some news station talk about
how “The Market” has performed today?

“The Market” usually refers to one of the 3 major United States (U.S.)
stock market indexes:
Dow Jones Industrial Average (DJIA) – Also known as the “Dow”.

The Dow is regarded as one of the most followed indexes in the
entire world. The index is made up of 30 of the largest publicly traded
corporations in the U.S.. Being that the Dow is made up of 30 of the
largest companies in the U.S., it is believed that the index provides an
accurate assessment of the U.S. stock markets overall health.
Standard & Poor’s 500 Index – Also known as the S&P 500. The S&P
500 is regarded as the most efficient gauge in assessing the overall
health of the U.S. stock market. This is because it tracks the
performance of the 500 largest publicly traded corporations in the
U.S., as opposed to the Dow, which tracks 30 large-cap stocks
NASDAQ Composite – Tracks roughly 3,000 stocks that are traded

on the Nasdaq Exchange, and is predominately made up of
Information Technology related companies. There is also a smaller
subset index within the NASDAQ Composite, called the NASDAQ 100,
which is an index made up of the largest 100 (non-financial)
companies that are listed on the NASDAQ Composite.
4
Some other well-known U.S. stock market indexes include:

Wilshire 5000 – This is the broadest stock market index that tracks
the entire U.S. stock market. As of 2020, the index holds roughly
3,500 stocks. These stocks include all the companies within the S&P
500, as well as thousands of other mid- & small-cap stocks.
Russell 2000 - This index is used as a benchmark to assess the state

of small-cap stocks within the U.S. It is a good indicator of how well
American small businesses are performing, separate from the large
conglomerate American corporations.
What is Market Capitalization?
Market Capitalization (Cap) - The total

dollar value of a company’s outstanding
shares of stock.

Wealth Dad EXAMPLE: Wealth Dad Inc.
Inc.
Total Shares = 5,000,000
Price Per Share = $100
Market-Cap
5,000,000 (shares) x $100 (share price) =

$500,000,000
5
All of the stock market indexes previously mentioned are interchanged
frequently by pundits who are discussing “The Market”.
Simply put, all you really need to know is that they each represent either the
entire U.S. stock market, or a smaller segment of the U.S. stock market.
Market Capitalization Sizes Defined
Large-Cap Stocks: Companies with market-caps of $10

billion or greater
Mid-Cap Stocks: Companies with market-caps between

$2 and $10 billion
Small-Cap Stocks: Companies with market-caps

between $300 million and $2 billion
Now that we have a solid understanding of:
What a stock market index is

Market capitalization and sizes
We can now move onto the essential topic of this book - The Almighty
Index Fund!
6
Chapter
The Almighty Index

Fund
The Index Fund 2
So now that you understand that a stock market index is simply a large
collection of stocks that measure either the total stock market, or a
smaller segment of a stock market, what do you think an index mutual
fund does?
An index mutual fund, commonly known as an index fund, is an

investment fund that pools money from many investors, and then uses
that money to construct a portfolio that directly matches and mirrors the
performance of a stock market index.
Did I lose you there?
Let's break this down using the S&P 500 as an example.
S&P 500 Index Fund

Companies like Vanguard, Fidelity and Schwab, all offer S&P 500 index
funds. These index funds are designed to collect investors money, and
invest that money in the exact same underlying stocks that make up the
S&P 500.
So instead of trying to do all the financial analysis and guesswork

yourself, and trying to pick individual stocks on your own, you can simply
invest in an index fund, like an S&P 500 index fund, and you will be
instantly diversified to over 500 of the largest companies in the U.S..

Imagine the S&P 500 as a pie, and an index fund is a perfectly cut piece of
that pie. Once you cut your perfect piece of that pie, you get all the
underlying ingredients in perfect proportion to the entire pie. So instead
8
The Index Fund 2
of working tirelessly on trying to figure out the right ingredients (individual
stocks) on your own, you can just purchase a piece of the entire pie and
have all the ingredients already prepared for you!
How Index Funds Make Money
Appreciation Dividends
The value of your index fund Distributed earnings from the

increases over time, as a underlying companies profits,
result of the underlying stocks and owed to you as a
of the index increasing over shareholder. Usually paid out
time. quarterly.
A massive benefit you have as an index fund investor, is the long-term

historical track record of stock market indexes, specifically the S&P 500.
S&P 500 Historical Performance

On the following page you will see the annual performance of the S&P
500 dating back to 1926. The annual returns disply both the indexes
9
The Index Fund 2
price return (appreciation) as well as re-invested dividends.
10
The Index Fund 2
Key Findings
1. Annual Return (with dividends re-invested) = 12.15%
2. Annual Real Return (inflation adjusted) = 9.65%
a. Assuming a 2.5% annual inflation rate
3. Positive Returning Years: 70
4. Negative Returning Years: 25
How Long Until You Double Your Money?

Given the 95 year historical performance, it is reasonable to assume that
over the long-term, your investment could double every 7.7 years.
Although reasonable, past returns are no guarantee of future returns.
Rule of 72
10% 7.2 years 72 Years to
__________ = Double Your
Annual Rate
Money
9% of Return
Rate of Return
8 years
8% 9 years
7% 10.2 years
6% 12 years
11
The Index Fund 2
It's helpful to know that the long-term return for the S&P 500 is profitable,
but there are many more types of index funds that track other market
indexes!
Types of Index Funds
Total Stock Market Index

S&P 500 Index
Mid-Cap Index
Small-Cap Index
United REIT Index
States Index Bond Market(s) Index
Funds Balanced Index
Developed Markets Stock Index

Emerging Markets Stock Index
FTSE All World excluding-US Index
Internationl Total International Bond Index
Index Funds
12
The Index Fund 2
Index Fund Types Defined
STOCKS BONDS
U.S. Total Market - Tracks the Government - Offered by the

entire U.S. stock market federal government, considered
the safest bond you could buy
Mid-Cap - Tracks medium-sized
U.S. companies Corporate - Bonds issues by
public companies, are more risky
Small-Cap - Tracks small-sized than government bonds
U.S. Companies
Municipal - Bonds issued by local
REIT's - Invests in companies that and state governments, to fund
purchase real estate like office local projects
buildings, hospitals, malls
Short-Term - Bonds with terms
Balanced - Invests in both the less than 5 years
broad U.S. stock & bond market
Long-Term - Bonds with terms
Developed Markets - Invests in longer than 10 years
stocks from developed countries
like Japan, United Kingdom, TIPS - Designed to help investors
Canada keep up with inflation
Emerging Markets - Invests in

stocks from emerging economies
like China, Russia, Brazil
13
The Index Fund 2
You maybe asking what the difference is between a stock and a bond.
The difference between the two investments is very simple.
Stock Bond
A piece of ownership A loan an investor
stake in a company. makes to a borrower, at
Riskier than a bond, but a fixed-rate. Less riskier
a higher potential than a stock, but less
reward reward.
At this point, we now know:
What index funds are

How index funds make money
Historical performance of the S&P 500
Types of index funds
Difference between stocks & bonds
So what gives? Why do we even need to invest anyway? Wouldn't we be
14
The Index Fund 2
okay if we just simply shoved our money in a bank savings account each
month, then let that money grow and take care of us over time?
I used to think this was all I had to do, because I didn't know any better.
Then I learned about money's silent killer - inflation.
Inflation
Inflation is the slow but steady increase in the cost of goods and
services over time.
This is why things like your rent, groceries, Chipotle burritos, travel
tickets, clothes, and shoes slowly increase in cost year after year.
Inflation in the U.S. now hovers around 2% annually, which means your
money needs to be growing by at least 2% every year, or it's losing
purchasing power every single year.
How Inflation has Changed The Price of A Loaf of

Bread Over Time
1970 1980 1990 2000 2010

| | | | |
$0.25 $0.50 $0.75 $1.99 $2.99
15
The Index Fund 2
While the increase in price for a loaf of bread doesn't seem like much,
when you magnify the cost of inflation on everyday goods and services
you require in your life, it's imperative that you invest to not only keep up
with inflation, but earn a higher rate of return than inflation.
If you keep your money in a bank savings account that is only giving you
less than 0.03% interest annually, you will find that come retirement, you
will have nowhere near the amount of money required to sustain your
lifestyle in retirement.
ETFs
I would be remiss to not go over Exchange-Traded Fund's (ETFs), as well
in this chapter on index funds.
ETFs also track market indexes (like the S&P 500), but the major
difference is that ETFs trade throughout the day like ordinary stocks.
Index funds don't trade throughout the day like stocks, they trade once per
day, which is after the stock market closes and all underlying asset values
have been calculated.
So all though ETFs trade throughout the day like a stocks, they still hold
the same underlying assets of an index fund that tracks the same market
index. For example, an S&P 500 ETF holds the same exact underlying
16
The Index Fund 2
500 stocks, that an S&P 500 index fund holds.
Another major difference is the minimum investments required to

purchase an ETF vs. an index fund.
Index fund's typically have investment minimums (e.g. $1,000 initial

investment) to gain access to the shares in the fund.
ETFs on the other hand, since they are traded like stocks, you simply
need to have the money required to buy whatever the ETF share price is
at the time.
Let's compare the Vanguard 500 ETF vs. 500 Index Fund
17
The Index Fund 2
The two essential benefits of the ETF over the index fund are:
1. Lower Initial Investment - You only need to save up $260 to buy a

single share of the 500 ETF, where you need a $3,000 initial
investment for the index fund
2. Lower Expense Ratio - 0.03% to the 500 index funds 0.04% expense
ratio
We can also take a look at how that lower expense ratio on the ETF side
has benefited it's long-term performance against the 500 index fund,
based off of an initial $10,000 investment in both 10 years ago:
As we can see, the ETF version actually slightly out-performed the index
fund version, due to the smaller fee (expense ratio).
So for a beginning investor, or even an experienced investor at that, ETFs
18
The Index Fund 2
also provide a great opportunity to invest in market indexes, like the S&P
500, at rock bottom costs.
It's important to keep in mind both expense ratios and minimum

investments for index funds and ETFs.
Each fund company (Vanguard, Fidelity, Schwab, BlackRock) all have

different minimums, as well as different share prices for their index funds
and ETFs.
Just don't waste too much time debating back and forth between
choosing between either ETFs or index funds that track the same indexes.
Although there are differences between the two, they're minimal. In the
long run, they both will perform just about the same.
The main differences between the two are the annual expense ratio they
charge, and the initial investment. The one that has the lower expense
ratio will most likely slightly outperform the other over time.
Now that we've gone over both index funds and ETFs, what about actively
managed mutual funds that promise market beating returns?
Can't we just trust our money with highly educated mutual fund managers,
whose expertise can lead us to even greater returns?
The answer may surprise you.
19
Chapter
Actively Managed
Mutual Funds
Actively Managed Mutual
Funds 3
Where index funds/ETFs simply track various stock market indexes,
actively managed mutual funds are designed to try and beat those
indexes.
An actively managed mutual fund is managed by a fund manager, or group

of fund managers, who researches and picks their own stocks/bonds, to
try and beat it's benchmark index.
Index Funds / ETFs vs. Actively Managed

Mutual Funds
Objective: Match the performance of a benchmark
index (e.g. S&P 500)
Strategy: Buy and hold all the securities in the
benchmark index it's tracking
Expense Ratio: US funds <= 0.05% / International
funds <= 0.15%
Index Funds / Tax Efficiency: Usually less taxable capital gains,
ETFs due to buy and hold strategy leading to less trading
Objective: Attempt to outperform it's benchmark

index (e.g. outperform the S&P 500)
Strategy: Manager buys and sells their own
securities, based off their research/expertise
Expense Ratio: US funds = 0.50 - 1% /
Actively International funds = 1 - 1.5%
Tax Efficiency: Potentially more taxable gains,
Managed Mutual
due to fund manager(s) trading more often
Funds
21
Funds 3
For a quick note, in terms of capital gains taxes, you will not have to
worry about capital gains taxes if your money is in a retirement account.
You will only have to report capital gains within your regular taxable
account.
We will discuss tax efficiency more in the next chapter when we review
retirement accounts vs. regular taxable accounts.
But if all of the actively

managed mutual fund
What are Capital Gains?
managers are getting
expensive MBA's at IVY Definition: Tax on the profits you
League schools like
realize from the sale of an asset,
Harvard, Wharton, Yale,
shouldn't they have the
based off it's original purchase price
inside knowledge to be
able to beat the market?
Index Fund Example
After all, they paid
Purchase Price = $100
around $150,000 -
$300,000 in tuition to Sale Price = $200
learn the ins and outs of Profit / Capital Gains = $100
the stock market, so
that's got to be worth
something right?
CNBC answered this question for us, in a recent study to see if actively
managed mutual funds did have the upper hand over index funds/ETFs. In
their study, they reviewed how large-, mid-, and small-cap actively managed
mutual funds performed in comparison to their benchmark index,
22
Funds 3
and the results were alarming. Not only did they find that the majority of
actively managed mutual funds failed to beat their benchmark index in a
1 year period (2019). They found that the number only increased as you
expanded the time length.
How Many Large-Cap Actively Managed Mutual

Funds Underperformed the S&P 500?
1 year 64.5%
10 years 85.1%
15 years 91.6%
Large-, Mid-, and Small-Cap Actively Managed

Mutual Funds 10 Year Underperformance
Large-cap 85.1%
Mid-cap 88%
Small-cap 85.7%
23
Funds 3
After reading the charts, we find that the amount of large-cap actively
managed mutual fund managers who were able to successfully
outperform the S&P 500 were:
1 Year: 35.5%
10 Years: 14.9%
15 Years: 8.4%
When we include mid- and small-cap actively managed mutual funds to

the equation, we see that the amount of mutual fund managers who
were able to successfully outperform their benchmark index over 10
years were:
Large-cap: 14.9%
Mid-cap: 12%
Small-cap: 14.3%
As you increase the time length, the more difficult it becomes for mutual
fund managers to outperform their benchmark index. Are there actively
managed mutual funds out there that do outperform their benchmark
index?
Sure, but history shows that your ability to identify that mutual fund /
manager is slim.
So if the majority of mutual fund managers who studied at expensive Ivy

League schools can't even beat the market, what makes you think that
you have a good chance?
The long-term historical performance shows that you will benefit more
by simply investing in a index fund/ETF, than trying to trust your
24
Funds 3
money with an expensive mutual fund manager, who most likely will
underperform their benchmark index over time.
So now that we know that index funds ETFs have the historical
advantage over actively managed mutual funds, we need to discuss how
we will begin to invest in these index funds/ETFs.
That starts with understanding the types of investment accounts at your

disposal.
25
Chapter
Investment Accounts
Investment Accounts 4
Seriously, how much better does it get then being able to invest in
hundreds - thousands of stocks all at once, through using simple low-
cost index funds/ETFs?
It makes living the rest of your life so much easier, by being able to
simply bet on all the stocks collectively, instead of trying to pick the next
Amazon or actively managed mutual fund and praying that investment
pays off.
Now that you understand that an index fund is an investment fund that is
constructed to mirror the performance of a market index, such as the
S&P 500, you now need to know the types of investment accounts at
your disposal.
After all, you can't simply go out and invest in an index fund from your
bank account. You must first open an investment account, and this is
where you will be doing all of your index fund purchases.
There are 2 types of accounts accessible for you, and they are retirement
accounts and regular taxable brokerage accounts.
Retirement Accounts
Retirement accounts are where you will be holding your long-term
investment money (age 59.5+).
The federal government, in an effort to encourage citizens to save for

their own retirement, has given massive tax benefits to retirement
accounts. These should be your first priority in funding, due to these
great tax advantages. There are many different types of retirement
27
accounts for you, whether you're an employee or an employer.
Most people are employees of someone else's business, so your

company will offer you a retirement plan such a 401k, 403b, 457, or TSP.
Make sure you enroll in your companies plan, because most of the time
they come with an employer match.
The term "employer match" means that they will contribute to your
retirement account, a certain percentage of your contributions. Most
28
companies will match your contributions at a rate of 2-3%, which means
that as long as you invest 2-3% of your income into your retirement plan,
then they will also invest an additional 2-3% of their own money into your
plan.
These employer contributions are completely free money, so take

advantage of it if it's offered!
As an employee who earns an income, you're also able to invest in an

Individual Retirement Account (IRA) on your own. This means that you
can have both a employer-sponsored retirement plan and an IRA!
Traditional vs. Roth

When deciding to open and enroll in a retirement account, the first
question you need to ask yourself is what type of tax-advantage do you
wish to opt for?
Would you prefer to have tax-breaks now, meaning that you can deduct
all your yearly contributions (not employer contributions) towards your
retirement accounts from your federal taxes come tax season?
Or would you prefer to pay your taxes now, and be able to benefit from
not having to pay any taxes on your retirement money later in life?
This is a crucial decision you need to make, because it is the answer to

whether you will opt to open a Traditional or Roth account.
I want to re-emphasize that you have a choice on whether you wish to

contribute to a Traditional or Roth work-sponsored retirement plan.
29
When you first enroll and open in a retirement account, you will be asked
whether you prefer to open a Traditional or Roth version of that account.
The differences in how each are treated in regards to taxes are depicted
below:
30
Traditional
Contributions: Using pre-tax (tax-deductible) money
Growth: Tax-FREE
Withdrawals: Taxed as regular income, meaning you will owe federal
and state taxes on the amount you withdrawal
Required Minimum Distributions: Yes - Starting at age 72
Roth
Contributions: Using post-tax (non-deductible) money
Growth: Tax-FREE
Withdrawals: Tax-FREE
Required Minimum Distributions: No
The choice really comes down to whether you want to pay taxes now, or
later in retirement.
Regardless of your decision, here are the current federal tax brackets,
and what you will owe in federal taxes based off either your tax-deferred
withdrawal amount (traditional) or taxable contribution money (Roth).
31
Don't forget that you will also owe state taxes as well, on top of your
federal taxes, unless you live in a state with no state-income tax.
You are also only allowed to contribute a up to a certain amount of

money towards each retirement account in any given year.
Retirement accounts are great because of their tax-advantages, but the

major downside of them is you cannot withdrawal your money from
them until age 59.5. Withdrawing those funds prior to that time will
result in an early withdrawal penalty.
This is where the regular taxable account comes into play, and allows
you to benefit from having investments that you can withdrawal from at
32
anytime time of your choosing.
Taxable Brokerage Account

Where retirement accounts are essentially off limits until you reach age
59.5, a taxable brokerage account is able to be tapped into whenever you
please!
There are pros and cons to this strategy:
Pros Cons
Able to withdrawal money Owe annual taxes on:
at any time Dividends
No contribution limits Interest
Capital Gains
Tendency to sell
investments quickly
As you can see, the major con is that your investments don't grow tax-
free, like they do in retirement accounts. You will have to report all of
33
your profits and earnings come tax season, whereas those same profits
in your retirement accounts are growing tax-free.
The benefits though are that you can contribute as much as you want to
your taxable account, and you can withdrawal your investments at
anytime, if you need them.
Wrap-up
Remember, whether you choose to open either a retirement or taxable
account, these are simply the buckets that hold your index fund/ETF
investments.
The accounts aren't investments themselves, they're simply holding

vehicles for your investments.
2 - Use the money

now in your
investment account
1 - Contribute to buy-and-hold
your money into index funds/ETFs
investment
account
34
Chapter
Time In The Market

Time In The Market 5
"Dude, you need to get out of the market, and get your money into cash!"
"You're still dumb enough to have your money in the stock market, while
Coronavirus is destroying the world?!"
"Stocks are about to crash, get out now while you still can."
"Gold, Silver, and Bitcoin are the future, how are you still wasting your time
with stocks?"
I'm sure at some point in time, someone has either told you, or you heard
in passing, somebody talking about how the financial system is collapsing
and that you need to get out of the stock market. In today's world of panic,
it's almost impossible to talk about the stock market without someone
giving you their opinion that the world is going to hell.
Just remember, the world has been through centuries of Civil Wars, World
Wars, Depressions, and now the Coronavirus pandemic. The one thing
that has stood consistent through the test of time?
The long-term returns of stocks, specifically the broad stock market as a

whole.
Famed Russell E. Palmer Professor of Finance at the Wharton School of

Business, Jeremy Siegel, conducted thorough research on the annual
returns of major assets classes over the course of 210 years (1802-2012).
He provided the results of his findings within his most recent edition of his
book: Stocks For The Long Run.
His essential finding was that the broad stock market (U.S. Stock Market)
36
has had by far the largest annual return rate from 1802-2012, over the
other major asset classes. In his chart below, you will see the value of a
single initial $1 investment into 6 major asset classes, and how that $1
grew over time:
As you can see, the patient long-term investor in stocks had superior
returns to that of investors in the other major asset classes. A single $1
invested into the broad US Stock Market in 1802, grew to $704,997 by
2012.
So how can you, as an investor, benefit from the superior long-term

return rate of stocks?
37
For starters, you can start investing as early as you possibly can!
Let's take a look at what happens to 2 different individuals who start

investing in the stock market at different ages.
Sally - Starts Investing @ 22

Sally graduates college and:
Opens a Roth IRA & invests $500/month into a S&P 500 index fund
Invests from age 22-60 (38 years)
Earns an 8% annual return
Contributions Growth Final Value

$228,000 $1,259,001 $1,487,501
Became a
MILLIONAIRE
38
Sally had a good friend, Sean, who prioritized living up his 20s instead of
getting his finances in order. He kept telling himself that he can wait till
later to worry about his retirement, so he waited to start investing until
he was in his 30's.
Sean - Starts Investing @ 32

Sean's been working for a decade and finally:
Opens a Roth IRA & invests $500/month into a S&P 500 index fund
Invests from age 32-60 (28 years)
Earns an 8% annual return
Contributions Growth Final Value

$168,000 $460,443 $628,943
39
Thanks to Sally starting 10 years earlier than Sean, she was able to
accumulate an additional $858,558 in her portfolio, due to the magical
power of compound interest!
Compound Interest
Compound interest is when your money begins earning interest, and
then that interest starts earning interest. As this process continues, your
earnings continue to accumulate. That new earned money then earns
you more money, creating a wealth snowball effect.
The compounded interest of your investments may seem minimal at the

start, but reference the previous bar graphs for Sally and Sean. Look
what happens to their money as the years go by. You will see how their
wealth snowball begins to pick up steam and really take off in the later
years of their investment time horizon.
This is why it is so critical to begin investing early in your life, so you can
begin to get compound interest working for you. The longer you wait, the
less time you will be able to benefit from compound interest working in
your favor.
As a stock market investor, who is hopefully using index funds, your

investments will be growing by appreciation and dividends (which you
should re-invest, further buying you more shares).
As your investments are appreciating and providing you dividends, your

next year's gains will then be growing on top of this years gains. This
wealth snowball cycle continues year after year, decade after decade, so
long as you continue to buy and hold for the long-term. Let's look at a
40
quick basic example of how compound interests earns you more money,
year after year:
41
As you see in the beginning, the interest earned is minimal. But as your
interest starts to get added to your principal, then that new larger amount
earns more interest.
In year 1, your $1,000 earned you $100. But navigate all the way down to
year 20, and you will see your original $1,000 compounded to over
$6,115. Then that $6,115 earned you over $611 of interest, which is way
more than the $100 you earned in year 1!
This is but a basic example using smaller numbers, to show just how
powerful compound interest can be for you if you start early enough.
Now just imagine if you began

contributing an additional
$100/month on top of the interest
your money was earning?
Compound Interest is
What if you began contributing an
the 8th wonder of the extra $200, $300, $400/month?
world.
What if you ramped your savings up
- Albert Einstein so much that you were investing
over $1,000 month?
It's important to note that as an index fund/ETF investor, the "interest"

you earn on your investment is from appreciation and dividends.
Now that you understand (hopefully) the power of compound interest

and time in the market, we must talk about how compound interest can
work against you, and that is by excessive fees on your portfolio.
42
Chapter
Cost of Fees
Cost of Fees 6
As an investor, you don't control the fluctuations in the market, but you do
control the fees you pay on your investments. The essential fee you need
to research first when reviewing index funds/ETFs and actively mutual
funds is the expense ratio.
The expense ratio is an annual fee that the fund company charges you as
a shareholder to cover administrative and management costs.
Fortunately for you, if you opt to adopt low-cost index investing, your
expense ratios will always be extremely low, in comparison to actively
managed mutual funds.
In today's investment world, where companies like Vanguard, Fidelity,

Schwab, and many more are competing against each other to lower fees,
a massive fee reduction war is occurring, in an attempt to win their
brokerage more clients.
This has benefited nobody more than the common investor (like yourself)
because index funds everywhere are becomming almost free to own.
The most recent example of this is Fidelity offering the first ZERO
EXPENSE FEE index funds:
Fidelity ZERO Total Market Index Fund (FZROX)

Fidelity ZERO Total International Index Fund (FZILX)
Fidelity ZERO Large Cap Index Fund (FNILX)
Fidelity ZERO Extended Market Index Fund (FZIPX)
These 4 funds charge a 0% expense ratio, meaning none of your

investment money is eaten away by excessive annual fees.
44
Cost of Fees 6
Now I know you may be thinking that "small" fees can't have that much of
a significant impact on your portfolio. To the contrary, it doesn't take
much larger of an expense ratio charged on your investments, to
drastically alter the amount of money you could've ended up with had you
invested in the lowest cost funds.
Let's take a closer look at the role fees play in the long-term performance
of an investment portfolio:
Invests $500/month
Opens a Roth IRA with Vanguard

Invests in the Vanguard 500 Index Fund
Amber (0.04% expense ratio)
Manages account herself
Invests from age 25-60
Investment returns 8% annually
Final portfolio value at age 60 =
$1,135,743
As you can see, Amber was able to accumulate over $1,000,000 by the
age of 60, by investing $500/month into a simple low-cost index fund. But
what would happen if Amber's friend, Tony, wanted to invest in a more
expensive actively managed mutual fund that promised him "market
45
Cost of Fees 6
beating" returns? Instead of earning just the "average" returns provided
by the low-cost S&P 500 index fund, Tony heard from his friend about a
hot mutual fund that he should invest into instead.
He also knows a college friend who graduated in Finance, and now is an

investment advisor. Tony calls him up, and they agree for him to manage
Tony's money, so Tony doesn't have to worry about it. The only catch is
that the investment advisor also charges an additional 0.50% annually
for total assets under management.
Invests $500/month
Opens a Roth IRA with Fidelity

Invests in a Actively Managed Mutual
Tony Fund (1% expense ratio)
Hires Financial Advisor that charges
0.50% annually to manage account
Invests from age 25-60
Investment returns 8.5% annually
Final portfolio value at age 60 =
$900,527
As you can see, Tony accumulated far less than Amber's low-cost index
fund approach. With the additional 0.50% fee charged to manage Tony's
account, hiring the investment advisor didn't maximize the value of his
46
Cost of Fees 6
investment. Let's take a side by side look at the differences between
Amber and Tony's investments and strategies.
Amber Tony
Invested $500/month, Invested $500/month,

for 35 years for 35 years
Annual Return: 8% Annual Return: 8.5%
Expense Ratio: 0.04% Expense Ratio: 1%
Advisor fees: NONE Advisor fees: 0.50%
Final Portfolio Value: Final Portfolio Value:

$1,135,743 $900,527
Money lost to fees: Money lost to fees:
$11,197 $246,413
47
Cost of Fees 6
In the scenario, we even gave Tony's investment advisor the benefit of
the doubt, in that he was able to invest Tony's money in a mutual fund
that returned 8.5% annually. That mutual fund earned higher annual
returns than Amber's S&P 500 index fund, which returned 8% annually.
Even though Tony's mutual fund outperformed Amber's index fund by

0.50% annually, Amber's index portfolio still ended up ahead of Tony's
actively managed portfolio by $246,413!
How did this happen?
FEES!!!
When you break down what the annual real returns were for both Amber
and Tony, you will see Amber actually had a higher annual real return
rate:
Amber's S&P 500 Index Fund

Annual Return: 8%
Expense Ratio: 0.04%
Investment Advisor Fees: none
Annual Real Return: 7.96%
Tony's Actively Managed Mutual Fund

Annual Return: 8.5%
Expense Ratio: 1%
Investment Advisor Fees: 0.50%
Annual Real Return: 7%
So even though Tony's mutual fund was outperforming Amber's index
48
Cost of Fees 6
fund, the fees were slowly eating away at the total portfolio's value.
While Tony may have not noticed these "small" fees over the course of
time, when he hit retirement, he was astonished to see that Amber came
out hundreds of thousands of dollars ahead of him, even though his fund
performed better!
These tiny fees are what can make the difference between retiring with a
million dollar portfolio or falling short of that million mark, and
potentially even short of your goals.
When you incorporate an investment advisor into the scenario, the

additional fees they charge for managing your money further eats away
at your portfolio over the years.
If you have the discipline to buy and hold index funds/ETFs over the
course of decades, and not panic when the news tells you that you need
to sell your investments, then you can manage your portfolio on your
own. This will save you all overhead costs that multiplied in Tony's
portfolio over the course of decades.
Now that we understand the devastating effects that fees can have on
your portfolio, the next step in our journey is figuring out which low-cost
funds are right for you and your investment path forward.
The first of these low cost funds, the Target Date Retirement Fund (TDF),
is the ultimate one-stop shop.
49
Chapter
Target Date
Retirement Funds
Target Date Retirement
Funds 7
It truly doesn’t get much easier than the Target Date Retirement Fund. For
those who are looking for the easiest possible investment strategy out
there, which doesn't require you to give up much of your time maintaining,
then the TDF is for you.

The TDF is essentially a “fund of funds”, meaning it is a single investment
fund that you can invest your money into, but that investment fund is
actually made up of multiple funds.
Vanguard constructs their TDFs using 4 broad based index funds, which
you will see below:
U.S. Total Stock

Market Fund
U.S. Total Bond

Target Market Fund
Date
Total International
Fund Stock Market Fund
Total International
Bond Market Fund
51
Funds 7
The way these funds work is that you invest in them based off of your
age and when you plan to retire. For example, a 25 year old who just
started working and plans to retire at age 60, has 35 working years
remaining until retirement. That means that if he began working in the
year 2020, then he would invest in a TDF that matches the year he plans
to retire. In that scenario, they would invest in a 2055 TDF.

You may be asking why these dates even matter, and there is a very
simple explanation to that question:

Typically, as you age, you want to decrease the level of risk (volatility)
you have in your portfolio, so that you aren’t primarily in growth-oriented
assets (like stocks) that can lose substantial value in a short period of
time, as you near retirement. The older you get, the more conservative
your portfolio should become. This is because your goals are no longer
solely on wealth accumulation, but now also wealth preservation.

When nearing retirement your main goal is preserving your nest egg, so
you would begin to allocate a more significant portion of your portfolio
to safer fixed-income investments (bonds), so that your portfolio is more
suited to weather any potential future economic downturns.
This is where the TDF shines. If a younger investor were to invest in a

2055 TDF, then that fund would hold a higher portion of its assets in
stocks (growth assets) and less in bonds (fixed-income assets). As the
years go by, the fund will automatically begin to re-allocate its portfolio
to meet the needs of the investor. Without you having to lift a finger, the
fund will re-balance its holdings, to where the stock portion will slowly
decrease over time and the bond allocation will increase.
52
Funds 7
If you are someone who truly has no interest in tinkering with your
investments at all, then dumping your money in a simple TDF that
matches your projected retirement year, may be the best option for you.
If this investment option does intrigue you, I recommend you use

Vanguard’s TDF’s because of their total diversification and low-fees.
Their funds expense ratios are roughly 0.15%. Schwab also offers great
low-cost TDFs, if you wish to research their funds as well to compare the
differences between the two.
53
Funds 7
If you think that investing in 1 simple TDF is too boring of an investment
style for you, and you prefer to build your own portfolio, there are a few
famous portfolios out there that you can model after.
They include:
Dave Ramsey's 4-Fund Portfolio

David Swensen's Yale Endowment Portfolio
"The Lazy" 3-Fund Portfolio
Will take a look at each of these different funds, and see how you can
replicate them on your own using Vanguard, Fidelity, and Schwab index
funds/ETFs
54
Chapter
Dave Ramsey Portfolio

Dave Ramsey Portfolio 8
Now maybe you’re an investor who wants to be a little more hands on in
your portfolio construction. The TDF is a great alternative if you ever
wish to become more hands off in the future, but for now, you have the
itch to build a portfolio from multiple different funds all on your own.
The good news for you is that

there are already famous Dave Ramsey
portfolio’s out there that you
can simply replicate on your
Baby Steps
own. One of the most famous
asset allocations is within the Save $1,000
portfolio that Dave Ramsey beginner emergency fund
recommends.
Pay off all debt
Dave Ramsey is one of the except for the house
most popular money
management voices in the Save 3-6 months
world of personal finance. He of expenses for emergencies
hosts one of the nation’s most
popular radio station shows, Invest 15%
The Dave Ramsey Show, of income for retirement
where he speaks on money
management principles. He Save for college
for your children
also takes guest calls from all
over the nation from listeners
who want his personal advice Pay off house
on their specific financial
concern.
Build wealth & give
56
His main products that people have come to know and love are:

Financial Peace University: This is a program that teaches people
who are struggling with their money, how to create a budget,
eliminate debt, build wealth, and various other money principles that
are designed to make you more accountable with your money making
decisions.
The Total Money Makeover: This book teaches Dave Ramsey’s
infamous 7 Baby Steps, that is designed to teach you how to gain
financial stability by getting you back in control of your finances.

Going back to the portfolio that Ramsey recommends, he recommends a
100% stock allocation that is broken down into 4 separate funds.
57
Now I know that you might be confused right now because you see the
words “Growth & Income”, “Growth”, and “Aggressive Growth” funds, and
we’ve never touched on what those terms mean.
The good news for you is that we actually did cover these terms in the
beginning of this book when we broke down Market Capitalization sizes.
However we simply used different terms for those different market cap
breakdowns:

Growth & Income = Large-Cap
Growth = Mid-Cap
Aggressive Growth = Small-Cap
After all this, we are now moving to the the really important part, and
what you probably wanted to know from the beginning!
How do we replicate his asset allocation within your own portfolio using
index funds/ETFs from either Vanguard, Fidelity, or Schwab?
The choice is yours on whether you elect to use index funds, ETFs, or a
combination of both. As previously mentioned, an index fund and an ETF
that track the same stock market index, will both be structured with the
same underlying investments.
Your initial research should be focused on the minimums, as the

majority of Vanguard index funds require an initial $3,000 investment,
whereas for the ETF, the minimum investment is simply the price of the
ETF share.
For example, if you want to invest in the Vanguard 500 Index Fund
58
(Admiral) shares, you will need to come up with $3,000 to initially invest
into the fund. If you elect to invest in the Vanguard 500 ETF, which
currently costs $263/share, you will have to save up $263 to buy a single
share of the ETF.
With that being said, let's observe how we can construct Dave Ramsey's
4 fund portfolio using either Vangaurd index funds or ETFS.
If you happen to have a Fidelity account and would prefer to keep your
Fidelity account(s) open, than that is fine, but there is one item to
consider.
Unlike Vanguard who already has their own established ETFs, Fidelity
doesn't have many ETFs of their own making that track various stock
market indexes. The good news though is that if you have an account
59
open with Fidelity, you can purchase iShare ETFs commission-free.
IShare's is a family of ETFs that were created by BlackRock.
An additional benefit is that these iShare ETFs also come with very low-
cost expense ratios. Below is how you could construct Dave Ramsey's 4-
fund portfolio using Fidelity index funds, or iShare ETFs.
If you have an account with Schwab, then they provide their own index
funds and ETFs that will assist you in constructing Ramsey's portfolio.
The only thing to make note of is that there is no Schwab S&P 500 ETF.
Instead, there is a Large-Cap ETF that tracks the Dow Jones U.S. Large-
Cap Total Stock Market Index. So this ETF tracks the 750 largest U.S.
companies, not just the 500 that make up the S&P 500. Don't let this
60
worry you too much, you will still be exposed to the asset class (Growth
& Income) that you need for this piece of your portfolio.
Always remember that you don't have to choose all index funds or all
ETFs. You can mix and match and customize your portfolio as you see
fit!
You now have the tools to construct Dave Ramsey's famous 4-fund
portfolio using low-cost index funds and ETFs from Vanguard, Fidelity,
and Schwab.
Always remember to keep in mind the minimum investments for each

fund, and that you can mix and match between index funds and ETFs as
you see fit.
61
Chapter
David Swensen
Portfolio
David Swensen Portfolio 9
What about replicating a portfolio that has helped guide Yale university's
endowment from $1 billion in 1985, to over $30 billion by 2020? This
same exact portfolio provided the endowment with 11.4% annual returns
over the 20 year period from 2000-2019, when the broad U.S. stock
market only returned 6.4% annually during that same period.
The manager of that endowment, David Swensen, did the average

individual investor a service by giving free advice on how you could fairly
replicate the asset allocation he uses for Yale's endowment, and it breaks
down into 6 asset classes:
30% Domestic Equity: Funds that represent the entire U.S. stock
market
15% International Developed Equity: Stock funds from developed
international countries like Japan, United Kingdom, Canada, Germany,
Hong Kong
5% International Emerging Equity: Stock funds from emerging
international countries like India, China, Russia, Thailand, Mexico, Brazil
20% Real Estate Investment Trusts (REIT): Funds that invest in
companies that purchase office buildings, hotels, and various other
real estate properties
15% U.S. Government Bonds: Funds that hold short-, intermediate-, and
long-term investment grade U.S. bonds
15% Treasury Inflation Protected Securities (TIPS): TIPS are designed
to protect an investor from inflation. The bonds principal is adjusted
quarterly based on the current inflation rate.
The important takeaway to note of Swensen's asset allocation is that no

asset class represents a significant majority of the portfolio. By design,
this was created so that if one of the asset classes has a major pullback,
63
then it won't drastically negatively affect the entire portfolio. There is a
healthy balance between U.S. stocks, international stocks, real estate,
and bonds, which dramatically reduces your portfolio's overall risk by not
over-allocating to a specific asset class.
Knowing that, here is how you can replicate his portfolio if you have a
Vanguard account and are using Vanguard funds.
64
Always remember to check the account minimums for Vanguard index
funds, because most funds require an initial $3,000 investment. If you
don't have that level of cash saved at the moment, electing to invest in
the ETF equivalents may be your best bet in the beginning.
If you're using Fidelity, here is how you can construct his portfolio using
Fidelity index funds and iShares ETFs. If you do elect to use the iShares
ETFs over the index funds, make sure you confirm they're still
commission-free approved ETFs before you invest in them.
65
Finally, if you have a Schwab account and would prefer to continue using
them and investing in their index funds/ETFs, here is how you would
construct Swensen's famed portfolio:
One thing to note is that Schwab currently (as of April 2020) does not
offers a U.S. REIT index fund, but fortunately they do offer the ETF version
of it, so you can gain your REIT exposure through the ETF.
Congratulations, you now know how to construct famed institutional
66
investment manager, David Swensen's recommended long-term
portfolio using Vanguard, Fidelity, and Schwab index funds/ETFs.
As stated earlier, it is imperitive that you research the investment

minimums for each brokerage index fund prior to investing. If you're
using Fidelity, confirm that the iShares ETFs you want to use have
commission-free trades. If the ETF's require trading commissions for
each trade (buy and sell) you do, then those funds comes directly out of
your investing money, leaving you with less total money invested.
To compare, building Swensen's portfolio will take you longer than if

you're building Ramsey's portfolio, because you have to account for 6
asset classes as opposed to the 4 asset classes under Ramsey's
portfolio.
There is nothing wrong with that, you just have to be smart with how you
initially build the portfolio initially.
If you're a younger investor, start with purchasing the stock and REIT
index funds/ETFs, since those are your more growth-oriented long-term
investments.
If you're older and nearing retirement, then you may want to begin with
investing in the bond and TIPS index funds/ETFs first, since those are
your minimal risk fixed-income investments. After you have your fixed-
income investments purchased, you can then build your stock and REIT
investments.
If Swensen's portfolio sounds too complex, then you can go in much

easier direction with the "lazy" 3-fund portfolio!
67
Chapter
3-Fund Portfolio
3-Fund Portfolio 10
By far the easiest and most simple portfolio to replicate on your own is
the "lazy" 3-fund portfolio. The 3-fund portfolio consists of only 3 low-
cost total market index funds:
1. Total US Stock Market Index Fund

2. Total International Stock Market Index Fund
3. Total US Bond Market Index Fund
The purpose of this fund is to provide the broadest diversification

possible, by spreading your money across three asset classes that are
typically uncorrelated. So if the U.S. stock market goes through a short-
term decline, then the other 2 asset classes may potentially offset those
losses.
Asset Allocation
The most work you will ever have to put in the 3-fund portfolio is
deciding your asset allocation, which is dependent on your age and risk
level.
In The Little Book of Common Sense Investing, Jack Bogle (Vanguard

founder) recommended the following asset allocations by age:
Young Investors: 80% stocks / 20% bonds

45 and older: 70% stocks / 30% bonds
Already retired: 60% stocks / 40% bonds
In regards to your stock holdings, Bogle recommended internationals

stocks hold a maximum allocation of 20%, while Vangaurd recommends
69
3-Fund Portfolio 10
a minimum of 20%. Let's take a look at potential portfolios for each age
group:
Young Investor
20% U.S.
Bonds
20% 60% U.S.

International Stocks
Stocks
Middle Age - Equally Weighted
33% U.S. 33% U.S.

Bonds Stocks
33% International
Stocks
70
3-Fund Portfolio 10
Retired
40% U.S. 40% U.S.

Bonds Stocks
20% International
Stocks
In regards to the funds you would use for building these portfolios, you
could use the following total broad market low-cost funds:
71
3-Fund Portfolio 10
The overall simplicity in using the 3-fund portfolio is extremely attractive

to a lot of investors, especially beginning level investors. It provides
instant global diversification over major asset classes, and at an
extremely low-cost.
Also note, these were simply examples of sample asset allocation

percentages based off age groups. You should always consider
speaking with a Certified Financial Planner (CFP) first, to go over your
risk level, so that you can map out an exact asset allocation that best fits
you.
Another great benefit of the 3-fund portfolio is the ease of rebalancing,

which will talk about in the next chapter!
72
Chapter
Portfolio Rebalancing
Portfolio Rebalancing 11
If you prefer to take the more hands on approach and build your own
portfolio, instead of choosing a simple TDF, then you will have the
responsibility of rebalancing your portfolio.
What does it mean to rebalance your portfolio?
Well in any given year, certain asset classes are bound to outperform
others, which is going to leave you with a portfolio that is now out of
balance, based off of your initial asset allocation.
Let's imagine that one year U.S. stocks return 10%, and International
stocks have a negative return of -5%. By the end of the year, this is going
to change the percentages within your asset allocation, and it will be
your responsibility to get those percentages back to matching your
original asset allocation.
Dave Ramsey Portfolio Example

For simplicity, let's use Dave Ramsey's 4 fund portfolio as an example
for this exercise.
We will assume you begin with an initial investment of $10,000. That

initial investment is then distributed to the asset allocation
recommended by Dave Ramsey:
25% ($2,500) - Growth & Income

25% ($2,500) - Growth
25% ($2,500) - Aggressive Growth
25% ($2,500) - International
74
Over the course of 1 year, the asset classes return different percentages,
leaving your portfolio out of balance from your initial asset allocation:
At the end of the year, your asset classes had annual returns of:
Growth & Income: +40% (+$1,000)

Growth: +20% (+$500)
Aggressive Growth: 0% ($0)
International: -20% (-$500)
75
At this point, you have a portfolio that is out of balance from your
original asset allocation. Instead of each asset class representing the
desired 25% each, you know have a asset allocation of:
Growth & Income: 32%

Growth: 27%
Aggressive Growth: 23%
International: 18%
There are two separate ways to go about rebalancing your portfolio, and
we will discuss both.
The first way is by selling your better performing assets, and using those
gains to buy more shares in your underperforming assets. We will use
retirement accounts as an example on how to perform this method of
rebalancing.
The second way is by purchasing more shares of your underperforming

assets, with new contributed money, and not funding your better
performing assets until your portfolio is rebalanaced again. We will use
taxable accounts to further explain this method.
Retirement Accounts - Selling Assets

If you're rebalancing your portfolio within your retirement account(401k,
403b, TSP, IRA), then you benefit from not having to worry about capital
gains taxes.
Capital Gains are taxes you pay when you realize profits from the sale of
an asset. For example, if you buy a stock for $100, and you then you sell
76
it for $120, then you realize a $20 profit ($120 - $100).
Since you're rebalancing your portfolio within a retirement account, you

don't have to worry about paying any taxes on your profits because your
money is growing tax-deferred until retirement. So now that you don't
have to worry about taxes, let's dive in on how to calculate what you
need to buy and sell to rebalance your portfolio.
The math is relatively simple on how to get each asset class back to
25%:
$11,000 (portfolio value) x 0.25 (25%) = $2,750
Knowing that we need to get each asset classes value to $2,750 each to
get back to our original asset allocation, here is how we can sell from
your winners, and use those gains to buy more shares of your losers:
77
To recap the sales and purchases from the previous chart, we:
SOLD - $750 Growth & Income shares

SOLD - $250 Growth shares
BOUGHT - $250 Aggressive Growth shares
BOUGHT - $750 International shares
The sales and purchases brought each of the asset classes back to 25%
each, which rebalanced our portfolio back to the desired asset
allocation.
Also, you should only rebalance your portfolio 1-2 times per yer, but I
recommend you simply do it once. Choose an annual date, such as Dec
31 (end of year) to do your reblancing, then go back to leaving your
portfolio alone.
Taxable Account - Buying Assets

If you are rebalancing your portfolio with a taxable account, you have to
remember that any profits you realize from sales of your winners will be
taxed as capital gains. This means that a portion of your profts will be
owed to the Internal Revenue Service (IRS) come tax season, but there is
a different strategy you can use to rebalance.
Instead of selling your winners and using the profits to buy more shares
of your losers, like we did within the retirement accounts example, you
can simply buy more shares of your losers with new contributed money.
What I mean by this is instead of worrying about selling anything, simply

leave your winners alone, and as you contribute more money to your
78
account, only buy more shares of your under-performing assets, until
your asset allocation becomes balanced again.
In this example, we will use our original out-of-balance portfolio, and

contribute a brand new $3,000 to the portfolio. This will raise our total
portfolio's value from $11,000 to $14,000. To figure out how many
shares we need to buy with our new money, we first need to do the math
on what 25% of $14,000 is.
$14,000 (new portfolio value) x 0.25 (25%) = $3,500
So in order to get each asset class to the desired 25%, each asset class
needs to have a value of $3,500. Here is the amount we will have to
purchase in new shares of each asset class, to get our portfolio
balanced again:
79
In this scenario, we assumed that you had $3,000 already saved in cash,
so all you had to do was invest that money appropriately towards each
asset class. If you don't have that money saved up already, that is fine.
If you're going to instead be investing smaller sums of money over time,

just keep in mind of your percentages. Slowly add more money to your
under performing assets, so that they eventually get back in balance with
your other better performing assets.
This will take a longer period rather than doing 1 lump sum payment, but
it's still possible so long as you mind your asset allocation as you slowly
add to your portfolio.
What Happens At Retirement?

Once you reach retirement, you are then presented with an entirely new
challenge.
That challenge is how much money you should withdrawal annually from
your portfolio, so that you never run the risk of running out of money.
The last thing you want to do when you hit retirement is burn through
your money too quickly, which will then force you back into the
workforce.
80
Chapter
Safe Withdrawal Rates

Safe Withdrawal Rates 12
Last, but not least, what happens when you have finally amassed a
fortune that is large enough to allow you to retire?
We have spent the entirety of this book discussing:
Index funds/ETFs
Types of investment accounts you can open
Sample portfolios you can model
How to rebalance your portfolio
Lastly, we need to go over how you will be able to live off of that money!
After all, you're not going to build up a $1,000,000 portfolio over decades,
just to go spend it all in 1 year. You need to know how you can safely
withdrawal from your total portfolio value, so that you will never run out of
money again.
Fortunately for you and me, 3 professors of finance at Trinity University

did all the leg work for us in figuring out this exact question.
The Trinity Study (The 4% Rule)

The Trinity Study was conducted in 1998 to determine how long one's
portfolio could last in retirement, based off of different withdrawal rates
and asset allocations.
The study includes portfolios made up of various stock/bond allocations,

and it is here where the popular "4% Rule" came to fruition. This is often
the financial rule of thumb that most people use to determine how much
of their portfolio they can live off of annually, without the possibility of
running out of money and outliving your savings.
82
For example, if you have a $1,000,000 portfolio, you can withdrawal
$40,000/year (4%), and most likely never run out of money
$1,000,000 (Portfolio) x 0.04% (Withdrawal Rate) =

$40,000
If you only need $20,000/year to sustain your lifestlye, then you only
need a $500,000 investment portfolio.
$500,000 (Portfolio) x 0.04% (Withdrawal Rate) =

$20,000
The original Trinity Study analyzed investment returns from 1926-1995,

and fortunately the study was recently updated to include investment
returns from 1926-2017.
The study includes 5 different asset allocations:
100% stocks
75% stocks / 25% bonds
Let's first take a look at the study's results, and see how different
withdrawal rates performed over time.
The study analyzes annual withdrawal rates of 3%, 4%, 5%, 6%, 7%, 8%,
9%, and 10%, over the course of 15 - 40 years.
83
84
85
Does the 4% Rule Actually Work?

What would be the point of using the 4% Rule if the results actually don't
confirm comfortable success rates over time?
If we take a closer look at the results of each withdrawal rate on the

varying asset allocations, you will notice how the 4% Rule fared over
different time frames.
Using a heat map on the following page, we will dive into seeing exactly
how each of the 5 asset allocations performed over the varying time
frames.
86
Key Findings
A 50% Stock / 50% Bond portfolio has a 100% success rate up to 30
years of retirement
To guarantee a success rate of 90% or greater for up to 35 years, you
need to have a portfolio of at least 50% stocks
A portfolio made up of 25% stocks / 75% bonds, had a success rate
below 50% after 40 years
A portfolio of 100% bonds, had a success rate below 50% after only
30 years, and only had a 11% chance of survival after 40 years
87
Please keep in mind that this study is based off of historical data for
stock and bond returns, and this does not guarantee the same future
returns.
As much as we can lean on long-term historical data, we can't ever

assume that future rates of return will be the same.
If you are nearing retirement, and returns haven't been as good as

historical returns, consider withdrawing only 3% of your portfolio.
A portfolio of 50% stocks / 50% bonds had a 100% guaranteed success

rate after 40 years, with a 3% annual withdrawal rate from the portfolio
International Investors
For international investors who live outside the United States, the
chapter ahead is just for you.
Although the accounts and funds that were discussed throughout this
book pertain specifically to U.S. investors, low-cost brokerages are
beginning to enter international markets and offer these same products!
I have provided a first action step you can take to see if one of the best
low-cost brokerages in the U.S., Vanguard, has entered your country's
market.
This will allow you the opportunity to see if you can invest in similar
funds within your country.
88
Chapter
International Investor
Resources
International Investors 13
Several of you reading this book are not from the U.S., nor have any
intention to live in the U.S., so many of the investment accounts and
funds mentioned in this book are not relevant to you as non-American
citizens.
Vanguard is continuing to break into international markets and offer

international citizens opportunities to invest in low-cost index funds and
ETFs!
Currently, Vanguard offers low-cost products/services to citizens from

certain countries in the Americas, Asia-Pacific, and European Regions.
Vanguards website for its international clients is:
global.vanguard.com/portal/site/home
After entering the URL, you will see a homepage that shows the
following page:
90
Once you land on that homepage, select on the region that your country
resides in. If your country is listed as able to invest with Vanguard, then
you are eligible to begin opening and building your portfolio!
Upon seeing your country, I recommend you:
1. Continue further researching the investment accounts, index

funds/ETFs offered to you as a citizen of your country
2. Contact an investment professional in your respected country, and ask
them how you can benefit from using Vanguard's low-cost services
3. Remember the roles that fees play in your investments, and make sure
you ask them how you can benefit from the lowest cost funds
possible
What If My Country Is Not Listed?

If you don't see your country on Vanguard's list, you still maybe able to
invest in their index funds/ETFs, as well as others brokerages index
funds/ETFs through using another low-cost brokerage available in your
country.
Fortunately a large percentage of my Twitter following is from

international citizens, and they were kind enough to list and recommend
their favorite low-cost brokerages they use in their countries!
On the following pages, you will see a compiled list of all of the
respondents countries, as well as the brokerages they use to invest in
low-cost index funds/ETFs.
If you still don't see your country, research Interactive Brokers, as they
are a large provider of low-cost investing services to many international
countries!
91
International Brokerages
Questrade
WealthSimple
Canada
EasyEquities
Interactive Brokers
South Africa
TD Ameritrade
Namibia
DeGiro
Interactive Brokers
Netherlands
Interactive Brokers
Hungary
92
Vanguard
Freetrade
United Kingdom Trading 212
Avanza
Interactive Brokers
Sweden
Interactive Brokers
China
Zerodha
Interactive Brokers
India
Trade Republic
Germany
93
Selfwealth
Interactive Brokers
Australia
Trading 212
Interactive Brokers
Belgium
DeGiro
Interactive Brokers
France
State Street (ETFs)

Interactive Brokers
Italy
DeGiro
Interactive Brokers
Ireland
94
Chapter
Recommended Further
Reading
Recommended Books -
Beginner 14
The Little Book of Common Sense

Investing
By: John C Bogle
The Coffee House Investor

By: Bill Schultheis
The Simple Path to Wealth

By: J.L. Collins
I Will Teach You To Be Rich

By: Ramit Sethi
96
Recommended Books -
Intermediate 14
The Bogleheads Guide to Investing

By: Mel Lindauer, Michael LeBoeuf,
Taylor Larmore
Common Sense on Mutual Funds

By: John C. Bogle
A Random Walk Down Wall Street

By: Burton G. Malkiel
97
Recommended Books -
Advanced 14
Stocks For The Long Run

By: Jeremy J. Siegel
The Four Pillars of Investing

By: William J. Bernstein
The Intelligent Investor

By: Benjamin Graham
98

Index Fund Investing 101

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Index Fund Investing 101

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INDEX FUND

THE BEGINNERS GUIDE TO

AKA THE WEALTH DAD

8 THE ALMIGHTY INDEX

36 TIME IN THE MARKET

51 TARGET DATE RETIREMENT

56 DAVE RAMSEY PORTFOLIO

63 DAVID SWENSEN PORTFOLIO

82 SAFE WITHDRAWAL RATES

90 INTERNATIONAL INVESTOR RESOURCES

96 FURTHER RECOMMENDED READINGS

Welcome to Index Funds Investing 101!

“Kid...above all else, take care of your retirement

book that I could find on Amazon. After reading voraciously on everything

Throughout this book, I will routinely recommend Vanguard as my

What's A Stock Market

Dow Jones Industrial Average (DJIA) – Also known as the “Dow”.

NASDAQ Composite – Tracks roughly 3,000 stocks that are traded

Russell 2000 - This index is used as a benchmark to assess the state

What is Market Capitalization?

Market Capitalization (Cap) - The total

Price Per Share = $100

5,000,000 (shares) x $100 (share price) =

Market Capitalization Sizes Defined

Large-Cap Stocks: Companies with market-caps of $10

Mid-Cap Stocks: Companies with market-caps between

Small-Cap Stocks: Companies with market-caps

Now that we have a solid understanding of:

What a stock market index is

The Almighty Index

An index mutual fund, commonly known as an index fund, is an

Did I lose you there?

Let's break this down using the S&P 500 as an example.

S&P 500 Index Fund

So instead of trying to do all the financial analysis and guesswork

How Index Funds Make Money

The value of your index fund Distributed earnings from the

A massive benefit you have as an index fund investor, is the long-term

S&P 500 Historical Performance

How Long Until You Double Your Money?

Types of Index Funds

Total Stock Market Index

Developed Markets Stock Index

U.S. Total Market - Tracks the Government - Offered by the

Emerging Markets - Invests in

At this point, we now know:

What index funds are

So what gives? Why do we even need to invest anyway? Wouldn't we be

How Inflation has Changed The Price of A Loaf of

1970 1980 1990 2000 2010

Another major difference is the minimum investments required to

Index fund's typically have investment minimums (e.g. $1,000 initial

1. Lower Initial Investment - You only need to save up $260 to buy a

So for a beginning investor, or even an experienced investor at that, ETFs

It's important to keep in mind both expense ratios and minimum

Each fund company (Vanguard, Fidelity, Schwab, BlackRock) all have

The answer may surprise you.

An actively managed mutual fund is managed by a fund manager, or group

Index Funds / ETFs vs. Actively Managed

Objective: Attempt to outperform it's benchmark

But if all of the actively

How Many Large-Cap Actively Managed Mutual

Large-, Mid-, and Small-Cap Actively Managed

When we include mid- and small-cap actively managed mutual funds to