Viable Market Alternatives

Compounding Concepts

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

What compounding does to accounts, even at a modest 4-6% return, is double the money in a predictable fashion every 5-7 years. At six percent, it outperforms the market throughout market history.

Example: Investment of $500,000

• An investment in the S&P 500 over the market’s history would have produced $32,852,000 today.
• Compounding with the same investment at six percent would have yielded $84,648,000.

Indexing Concepts

In finance and economics, indexing is used as a statistical measure for tracking economic data such as inflation, unemployment, gross domestic product (GDP) growth, productivity, and market returns. Indexing may also refer to passive investment strategies that replicate benchmark indexes.¹

What is indexing? Indexing is a passive investment strategy where you construct a portfolio to track the performance of a market index. It is commonly done with the S&P 500 index, where investors try to mimic the performance of the index. Indexing offers greater diversification, as well as lower expenses and fees, than actively managed strategies.¹

Source: Indexing: Definition and Uses in Economics and Investing (investopedia.com)

Key Takeaways

• An index gives a quick measure of the state of a market.
• Index funds are a low-cost way to invest, provide better returns than most fund managers, and help investors achieve their goals more consistently.

Do rich people invest in index funds?

Ultra-rich investors may hold a controlling interest in one or more major companies. But many millionaires hold a portfolio of only a few equity securities. Many may hold index funds since they earn decent returns and don’t require time spent managing them.

Example: Investment of $500,000

Utilizing the indexing concept, this would have yielded more than $817 million today vs. $32 million.

At Integrity Financial BCS, we often marry the two concepts. If they were to occur based on our example, the result would be $2.4 billion vs. $32 million. The concepts referenced not only consistently beat the market, but they do so with complete safety and tax efficiency.