you've probably heard that investing in the stock market is complicated but that's actually false yes chart analysis and stock picking can be extremely complicated however strategies like that are actually not recommended in fact the greatest stock picker of our time Warren Buffett has even said himself that most people out there should just own a low-fee S&P 500 Index Fund but he even took things a step further by wagering a now famous bet against five hedge funds to prove this strategy Works Buffett placed a $1 million bet against these seemingly cuttingedge stock Pickers wagering that a simple S&P 500 Index Fund would beat every single one of them over a 10-year period in his 2017 letter to shareholders Buffett shared the results and while some of the hedge funds got off to a good start the S&P 500 beat all of them by a massive margin during that decade the S&P 500 returned 125 point 8% meanwhile the portfolio of hedge funds had returns generated ranging from 2. 8% On The Low End to 87. 7% on the high end point being is that you are in the right place and you are following the correct strategy I'll be showing you exactly how to follow this approach which smoked the hedge funds by investing in a low fee Vanguard S&P 500 ETF just like Buffett recommends so stick around to the very end because this video has the rare potential of turning you into a millionaire and I'll even prove it for starters let's define what the S&P 500 is the standard in pores 500 Index is a market value weighted index of the 500 largest publicly traded companies in the United States market value weighted simply means the larger a company is in terms of their market capitalization or total market value the more weight that they carry in the index so when you invest in the S&P 500 a large portion of your your money goes right into stocks like Microsoft Apple Nvidia Amazon and meta finis has a visual heat map that shows you this in action the larger the square is the more of your money gets allocated there now the S&P 500 was launched in 1957 which predates many of the companies that are included in the index today to adjust for this the 500 companies included in the index change over time based on what companies are the most valuable as well as a few other set criteria the S&P 500 is the most widely accepted Benchmark for tracking the US Stock Market and because it has been around for so long we have Decades of historical performance to look back on according to NerdWallet the S&P 500 Index has returned about 10% on average per year assuming you are reinvesting dividends in addition to returns being generated from the share price of the stocks going up over time you also have the secondary income stream of dividends being earned this is is a way that well-established companies that might not be growing very fast anymore will share a portion of their profits with the shareholders in order to keep them sticking around later on I'm going to be showing you exactly how to enable dividend reinvestment within your brokerage platform to make sure you're maximizing your return potential so why do people invest in the S&P 500 well the very reason for investing in the first place is to protect your buying power from inflation as well as to grow the value of your money over time inflation has historically been around 2% annually but since the pandemic and the stimulus money that entered the economy inflation has been at elevated levels now this makes investing all the more important because idle cash is losing purchasing power at a faster rate than it has in the last 40 years or so now in addition the S&P 500 gives you broad diversification across the entire US economy let's revisit that fin viz heat map that I showed you earlier when you invest in an index like the S&P 500 your money is spread out across all of these different sectors and industries this gives you exposure to all of the different segments of the United States economy and even if one particular company or segment takes a nose dive the rest of what you own will help you offset that you also have the benefit with this strategy of following a set it and forget it approach where you can fully automate everything and then spend your time doing whatever you would like to and get this the S&P 500 has the potential of turning you into a millionaire let me prove it to you now what we're looking at here is a compound interest calculator and this shows us how the value of your money can grow over time through investment I just did a full video on compound interest explained for beginners so I'll put a card in the corner but let me go ahead and give you a simple explanation now the rate at which your money grows is going to accelerate over time because when you earn compound interest through something like the stock market the returns that are generated are also able to earn future returns and the dividends that are earned assuming you reinvest them are able to earn future dividends themselves so let's say you start off here with a$0 initial investment and you're contributing $500 per month into the S&P 500 and we're assuming you're going to experience that average 10% annualized return from the S&P 500 after 10 years of following this strategy your portfolio would grow to a value of just under $100,000 now in terms of your total contrib tions you would have contributed $60,000 and you would have about 35,000 in capital gains right now this chart is really nothing too exciting I mean you have had a little bit of growth there but just wait and see what happens as we push the timeline out further and further we're now going to adjust this and look at the 20-year Mark and most people would think that this number would be roughly double or about 200,000 but this is where you can see the magic of compound interest starting to take place if we click on the calculate button we can see now the portfolio has has grown to almost $350,000 which is a heck of a lot more than double what we were at prior if we take a look here at the contributions you've contributed 120,000 and now you've had about 210,000 or 220,000 in terms of your gains from the market and if you take a look at the red line you can see where it's beginning to accelerate at a faster and faster rate and every single year you're earning more in returns from the market and this has less and less to do with the amount you're contributing and more to do with the momentum that has been established through these Decades of investing at this point though I want to show you how long it would take you to become a millionaire and I did this in advance so I already know and that answer is just 31 years if we push out to the 31e mark and click on calculate you would now have 1.
09 million in your investment account and that red line is just continuing to accelerate at a faster and faster growth rate now in terms of your contra contributions you've contributed about 186,000 and in terms of your investment gains you've made a little over 900,000 from the stock market by investing over the long haul that is the magic of compound interest and this is something that you can do yourself through a strategy like S&P 500 Index Fund investing now I'm going to show you how to put all of this into action using the commission free stock trading app Robin Hood and if you want to get a free stock in the process worth up to $200 be sure to use my affiliate Link in the description below the very first thing you're going to want to do is visit Ryan os. com robobin Hood it brings you to this screen where it mentions that you will be able to get a free stock and actually pick that stock from a list of leading American companies so what you'll end up getting here is a fractional share and you'll be able to pick which particular company you want that to be a fractional share of all you're going to do here is enter your name as well as your email and password and click on continue and then you're going to download Robin Hood from the App Store now I already have an account so we're going to jump into that now but if you're looking for a full tutorial on how to get started with Robin Hood I will put my Robin Hood Investing For Beginners video in the corner that way you can watch that and get a full overview on getting up and running with this stock trading app here we are inside of my Robin Hood app and right now I have a balance of $0 so the very first thing I need to do is deposit some money so I'm going to click here on buying power I'm going to click on deposit funds and I'm going to take $20 and deposit it into my Robin Hood account you're going to be able to invest using fractional shares and that's really cool because you can invest in $1 increments into stocks and ETFs which makes the barriers to investing really really low here so we're going to click on the review button and then once I'm all set I'm going to click on transfer $20 and then once I click on the continue button we can see we have an instant deposit available so one of the things I like about Robin Hood is they give you instant access to your funds even before they clear from the bank so that means that you can invest right away using this app so now we have $20 of buying power in the investing app what we're going to do is click on the search button in the top right and we're going to search for the Vanguard S&P 500 ETF and the symbol for that is vo now you can click here and see what the S&P 500 has done over time but the main thing to understand with this is if you look over the long run the S&P 500 continues to go up and make people money even when you do have these dips in the market I'm going to be showing you how to follow a strategy known as dollar cost averaging later where you have recurring money going into the market and you're buying at routine intervals and that means that you'd be buying some when the market is up you'd also be buying it as it goes down and all across the timeline here meaning that you're paying the market average for those shares over time what we're going to do now is just scroll down and I'll show you some more information here about this particular ETF and you can get a really nice visual here that shows you what sectors your money is going into now because the most valuable companies in today's modern economy are tech-based 30% of your money goes into the technology sector second to that we have financials and then healthc care both at around 12% and then we have consumer cyclical etc etc in the past you would have seen more of your money going into Industrials or these other segments of the economy that used to be the most valuable companies but as that changes over time because this is a market value valuated index the allocations are going to change and in terms of the top Holdings if you click here you can see what stocks the majority of your money is going into and this always blows my mind when you invest into this fund let's say you put a dollar into this fund for example 7 cents of that is going to go right into Microsoft about 5. 6 cents goes into Apple about 5 cents goes right into Nvidia and then you have Amazon meta alphabet Class A birkar the other class of alphabet which which is Google's parent company Eli Lily and then broadcom a lot of your money goes right into the top five biggest names because of how dominant those companies have become in today's economy so a lot of people think the S&P 500 is like this boring investment but in fact a lot of your money is going into the most Innovative companies in the US economy but what we're going to do now is actually purchase some fractional shares of this ETF so we're going to click on the trade button here and then we're going to click on buy and right now it's set to purchase shares so if I wanted to buy one whole share of this it would be about $458 which obviously I don't have but if you click up here you can buy in dollars and buy in $1 increments so if you wanted to put literally just $1 into the S&P 500 you could do that with Robin Hood but in this case we're going to do $20 and invest this into the S&P 500 what we're going to do from here is click on the review button and it's going to purchase 0436 5 shares of VO and when we're all set we're going to swipe up to submit that order and just like that we invested in a fractional share of the S&P 500 ETF and you can see that overall so far there's been a return of 05% so the price is always going to be fluctuating and if you want to take advantage of that strategy of dollar cost averaging you can set up a recurring investment here and you could invest every day and the Market's open you could invest every week every two weeks or every month and have a recurring contribution going into the S&P 500 ETF and this would be just like what I showed you in the compound interest calculator of investing $500 per month so if you want to fully automate this strategy you can do this right here by investing on a recurring schedule and the very last thing I want to show you now is how to enable dividend reinvestment to make sure you're maximizing your returns in order to do that you're going to click on the person icon here you're going to click on the three dots in the top left and then you're going to click on investing within this you can scroll down and you can see the section here about dividend reinvestment it's currently disabled but if I click on enable dividend reinvestment we're going to click on continue and then it tells us how it works so basically it's going to automatically reinvest any cash dividends on the next Market day back into whatever the asset is that issued that dividend you can also pause this at any time we're going to click on the continue button I'm going to click on review here and agree to these terms and just like that we are now enrolled in drip or a dividend reinvestment program as I earn dividends from the S&P 500 ETF they're going to be reinvested back into more fractional shares allowing me to maximize my return potential what I just showed you is the strategy of dollar cost averaging into fractional shares of VO which is the Vanguard S&P 500 ETF but now I want to take you under the hood here and show you more about this particular ular ETF the first thing I want to explain is what is an ETF well that stands for an exchange traded fund and this is simply an index fund that's split up into individual shares and then those shares trade on an exchange just like an individual stock this makes things a lot more flexible because you can buy individual shares of this ETF instead of investing directly into an index fund which could have a higher minimum investment and using something like Robin Hood and their fractional shares you can actually buy a fraction of one of those individual shares in $1 increments that means you can literally take a buck and put it into thep 500 and be completely Diversified across the 500 largest publicly traded us companies through one single investment now every fund out there has an expense ratio associated with it and this fee is used to pay the fund managers as well as other administrative costs the good thing about Vanguard is they have some of the most competitive fees in the entire in investment industry and for vo the expense ratio comes in at 0.
03% compared to an industry average of. 79% that means if you invested $10,000 into vo you're going to pay $3 of annual fees to Vanguard for basically managing that fund on your behalf now you don't have to pay this fee separately or anything like that it actually comes right out of the fund itself but that is a very low fee compared to what you will across the industry as far as the dividend yield goes this ETF pays a yield of 1. 3% on average over the last 30 days and that's because the yield is going to fluctuate based on the share price of the particular ETF now if you want to learn more about Vanguard index funds specifically I also have a full video on that which I'll put in the corner and you can check that out to learn more about Vanguard and what they have to offer but now we're going to talk about an aspect of investing that most people like to try to avoid entirely but you have to plan for this from the beginning and that is investment taxes the type of investment account that you use has a huge impact on the amount of money that you pay in taxes if you invest using a taxable brokerage account you'll most likely end up paying long-term capital gains tax rate on your investment gains and that caps out at 20% on a federal level and there also could be additional state taxes owed in the previous example we looked at investing $500 a month for 31 years earning the average 10% return from the S&P 500 and becoming a millionaire in the process but here's the crazy part as we mentioned your investment account would be worth about 1.
09 million but the amount that you contributed yourself is only $186,000 that means if you cashed out of the market all at once and simply wanted to take your million doll and do something else with it you would have roughly $95,000 in capital gains and at just a 20% tax rate on the federal level that would be 181,000 owed in taxes now in addition you would also be required to pay taxes on your earned dividends even if you're just reinvesting them if you were earning a 1.
