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Show Notes

WTF Is An Index Fund? | 11

Episode Recorded On: January 18, 2021

And why everyone is so damn Hot To Trot about them. We take it back to basics, expose the Dark Side of index fund investing, and even share a few indexes you probably haven’t heard of.

What are Stocks and why do they increase in value?

  • When a company wants to raise money to re-invest in growing their business, stocks are one way they can do that. They sell a piece of their company, a stock, in exchange for money that they can invest in growing their business.
  • Tangible increase in value is typically due to company growth + currency inflation.
  • Intangible increase in value is due to market perception (ie. we think this is going to be ‘the next big thing’).

What are Index Funds & How are Index Funds created?

A stock market index measures the performance of a group of companies. So, the S&P500 for example, tells us how well 500 of the largest companies in the stock market are performing.

A big investment company actively invests in all the companies they want in the index and then sells shares of the index to smaller investors like us who couldn’t possibly afford to buy full stocks in all companies in the market.

What makes Index Funds so special?

  • Simple math game: a losing stock can go from 100% (the price you purchased it at) to 0% but a winning stock can go from 100% to ∞ SO your wins always outpace your losses… meaning your total investment value grows over time.

The advantages that have led to index funds being a popular investment choice:

  • Simplifies investing so you can live your life.
    • Doesn’t require a lot of time.
    • Doesn’t require deep knowledge of individual companies.
    • Doesn’t require you to constantly stay up-to-date on current market trends.
  • Historically reliable
  • Self Cleansing

Tax Implications

  • Taxes
    • Regular Brokerage Accounts
      • If you sold the stock within 1 year of purchase:
        • Short Term Capital Gains Tax
          • Tax rate is the same as your income tax rate for that year.
      • If you sold the stock more than 1 year after purchase:
        • Long Term Capital Gains Tax
          • Tax rates are 0%, 15% or 20% depending on your taxable income and filing status.
      • Bottom Line: Long-term capital gains tax rates are usually lower than those on short-term capital gains. That can mean paying lower taxes on stocks.
    • Retirement Accounts
      • Traditional IRA
        • Taxes are deferred until you start withdrawing funds in retirement.
      • Roth IRA
        • Tax Free withdrawals in retirement

Full Transcript

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