Invest Like a Pro: Make $100 a Day with Index Funds
At some point in life, many of us find ourselves contemplating the question of how to generate $100 a day through investing in index funds.
Well, maybe it doesn't happen like that, but if you're here reading this article, chances are you're at least somewhat intrigued by the idea of combining index fund investment with passive income.
Alternatively, you might not be particularly interested in any of this, but the allure of earning $100 dollars a day caught your attention, and that seems like a reasonably attainable amount to not be skeptical about.
Regardless of your motivations, I'm taking this opportunity to share with you my favorite investment strategies.
From a statistical standpoint, this approach is likely the simplest route for about 99% of investors to accumulate wealth.
It's important to note that this isn't an overnight success plan and absolutely, this isn’t a scam.
Why Index Funds?
Okay, let's zoom out and look at the big picture:
the goal is to generate one hundred dollars a day through investing in index funds.
To delve a little deeper, it's crucial to grasp the rationale behind index funds in the first place.
Instead of purchasing individual stocks of single companies, which could succeed or fail, an index fund encompasses a small fraction of a broad spectrum of assets that you can acquire for a single, affordable price.
This way, you reap the advantages of the entire market without the need to carry out the extensive research yourself.
Example Of Index Funds
Imagine if I own a thousand apartment buildings, and each is valued at a thousand dollars.
You could decide to meticulously research and buy any one of these buildings for a thousand dollars, gaining full ownership of it.
On the other hand, you could invest a thousand dollars automatically, resulting in ownership of just 0.1% of the entire portfolio.
So, what's the decision?
Well, with the first option, even though you wholly own a building, there's the risk that things could go wrong—tenants might not pay, the area's value could decline, or the building might require significant repairs.
Suddenly, your investment's worth could plummet.
There's also the uncertainty of predicting which apartment building will perform the best.
What if you chose the wrong one?
Conversely, the second option entails owning a small share of everything.
You obtain the average returns across a diverse portfolio of a thousand different rental properties.
Even if a few don't perform well, the majority should more than compensate for any losses, and you're spared the constant worry of making the right choice.
Essentially, this explains the concept of index funds.
The Benefits Of Index Funds
If your intention is to invest a modest sum to acquire shares of all 500 companies within the S&P 500 index, you can achieve this by using something like VFIAX for slightly above $400.
Similarly, if you're interested in a real estate index fund encompassing numerous apartment buildings and hotels, VGSLX is available for $119.
Moreover, you can gain exposure to a wide array of technology companies through VGT, or opt for a more comprehensive approach by selecting VTSAX.
This implies that with just a few hundred extra dollars to spare, you could practically obtain a small slice of virtually every existing stock, without the necessity of individually purchasing each one.
Subsequently, you can sit back and let the market perform its work, all while enjoying some leisure time watching YouTube videos.
Furthermore, due to the simplicity in managing index funds and their low overhead, the resulting savings are passed on to investors through reduced fees.
This allows you to sidestep the expense of funding an extravagant investment manager's luxurious lifestyle.
Notably, index funds have historically outperformed the majority of professional portfolio managers over 15-year periods, with figures ranging from 92% to 97%.
This stark reality is a reminder that trying to outsmart the market, especially through emotional and trendy investing, often leads to underwhelming results.
A staggering 99% of investors cannot consistently beat the market long-term.
Diversification and stability are paramount advantages.
Even if you possess a portfolio of 20 or 30 stocks, the risk of some declining and affecting your overall average remains.
Additionally, having too much concentration in a particular sector can prove perilous.
However, index funds offer a straightforward solution—there's no stress, no confusion, just consistent and uncomplicated investment.
The Passive Approach
With the explanation of index funds established, let's proceed to the aspect of passive $100 a day income, as that's likely what brought you here.
Now, when discussing passive income, the goal is for it to be genuinely passive.
Many envision waking up to thousands of dollars appearing without effort, but the reality often involves nuances.
Some forms of passive income demand continuous effort, like managing a rental property, while others can be disrupted overnight by algorithm changes, as seen in numerous online businesses.
Some require substantial upfront effort for future gains.
I'll be frank: the approach I'm discussing genuinely entails 100% passive income, allowing you to earn decent money with minimal long-term risk.
How To Generate Passive Income?
I personally follow this strategy myself, but it requires a skill that many spend their entire lives acquiring:
Patience.
Generating $100 a day passively through a simple investment accessible to anyone takes time.
The positive aspect is that it's not complex or challenging.
However, you need to be comfortable with gradual growth and avoid trying to rush the process for quick gains, as that approach will not yield results.
That being said, once you witness passive income flowing in, be ready to become deeply engrossed.
You'll likely reinvest everything back into your portfolio to speed up its growth.
Although it begins small, there are two avenues to making passive income through index funds.
Method #1
The more common approach, and the one that naturally comes to mind for most, involves dividends.
Whenever you purchase a stock, you're entitled to a share of that company's earnings.
Often, these profits are periodically distributed as dividend payments.
Given the broad coverage of index funds across various companies, dividend payments are a common component of your investment.
These dividends typically range from around 4.47% for real estate index funds to 1.47% for S&P 500 funds, or 1.45% for total market funds, and potentially as high as 10.5% for high-yield dividend funds.
Across most index funds, you'll generally find annual dividend payments ranging from 1.4% to 4.5%.
This could be one of the simplest forms of passive income you'll ever encounter.
For every thousand dollars you invest, you'll receive around $20 deposited into your bank account without any effort apart from investing your money.
One crucial aspect to consider is that when it comes to dividends, your income will be subject to taxation.
It's essential to leverage this to your benefit and ensure you're not paying more taxes than necessary.
To achieve this, you should aim for what's termed "qualified dividends."
These are dividends originating from US-based companies, and as a reward for holding onto these investments for over 60 days, the dividends are subject to the long-term capital gains rate.
This rate could be zero if your annual earnings are below $44,000 for singles or $89,000 if married.
For those earning more, qualified dividends are taxed at a favorable 15%, and any amount surpassing that is taxed at 20%, plus potential state taxes—like in California.
This approach is significantly more cost-effective than paying taxes on dividends as regular income, resulting in more money remaining in your wallet annually.
It's crucial to be aware of this because while dividend payments can be alluring, upfront taxes could substantially erode your profits if not managed carefully.
Method #2
The subsequent strategy for generating passive income through index funds is centered on growth.
In my perspective, this is the actual rationale behind investing in index funds, beyond the dividends.
While dividend payments are a welcome bonus, the real gains are achieved as the value of the index fund appreciates over time.
Investing in something like a total stock market index fund signifies a stake in the continuous growth of the entire economy.
Businesses become more efficient, people invest to become part of it, and historically, such investments have yielded over an 8% annual increase in value.
If we examine the last century in the US, the S&P 500 has showcased a 10% annualized return with reinvested dividends.
The remarkable aspect here is that you won't be taxed on this growth and profit until you decide to sell.
Consequently, your money can grow completely tax-free until the point you choose to utilize the principal.
At that juncture, taxation occurs at the long-term capital gains rate, enabling you to strategically sell your investments at different times to minimize your tax bracket.
Regardless, considering these funds historically achieve an average growth rate of over 8% annually, investing $1,000 will provide you with approximately $80 in passive growth every year on average—funds that you could subsequently reinvest or utilize as you see fit.
The 4% Rule
When it comes to leveraging all of this to generate an additional $100 daily, here's what you should understand.
If you approach this purely from the standpoint of dividends, the outlook might not appear rosy.
With an average annual dividend rate of 2%, you would require an investment of $1,850,000 to yield $100 a day in passive income through an index fund.
Achieving this isn't out of the realm of possibility, though.
- By investing $17 a day, you could reach that goal in around 40 years.
- Bumping that daily investment to $30 a day would shorten the time to 33 years,
- and contributing $50 daily could get you there in 27 years.
Now, I understand this might not align with your expectations, as you might have been hoping for a shortcut or some magical solution that could achieve this in a matter of months.
While I can't perform magic tricks, fortunately, there's a somewhat swifter approach available that anyone can use, known as the four percent rule.
This principle, also referred to as the Trinity Study, is a foundational concept in early retirement planning.
It proposes that you can annually spend four percent of your portfolio without exhausting your funds.
This is based on the fact that, as your portfolio grows by an average of around eight percent, historical data indicates you could safely spend half of that growth, allowing the remaining portion to continue compounding on your behalf.
In essence, it's akin to cultivating a rose garden large enough to provide a fresh bouquet of roses each month without depleting the supply.
However, in this scenario, the rose is actually money.
Let's consider a scenario where you periodically sell four percent of your portfolio each year as passive income.
In this way, you could reach your goal of $100 a day by investing $920,000 in a comprehensive index fund that covers the entire market.
I understand that this is a substantial figure that many people won't be able to amass in a short period, possibly not even in several years.
However, when broken down into a daily habit as simple as brushing your teeth, the attainability becomes much clearer.
Similar to our previous example, investing just $10 a day leads you to the goal in 38 years.
Although it's a lengthy timeline, investing $10 a day is a commitment that nearly anyone could manage on autopilot without much thought.
By the time you approach retirement, you would have comfortably reached your objective with minimal effort.
For those willing to invest more, the process can be significantly expedited.
- At $20 a day, you could attain the goal in 30 years;
- with $30 a day, it's 25 years;
- and allocating $50 a day would achieve it in just 20 years;
- and if you're able to throw in $100 a day, you're only 13 years away from realizing that reality.
And beyond that point, it becomes essentially passive.
Why Most Will Fail
Regrettably, I'd say that impatience is one of the most substantial obstacles that hinder people from pursuing this approach.
It's not necessarily the setup or effort required—once you've configured this with a brokerage and established automated investments, your involvement is minimal, typically taking around 20 minutes.
However, the challenge often lies in confronting the prospect of another 20 years and considering alternative options instead.
That’s why many individuals don't even embark on this path.
But let me share this thought: it's analogous to hitting the gym.
Once you initiate the process, you'll be reluctant to stop.
I've yet to encounter someone earning even a modest $5 per day passively who isn't genuinely enthusiastic about the concept of passive income and earning money without active effort.
As you observe the momentum of your investments working in your favor, you'll likely become engrossed with the process, much like myself.
You'll then explore various avenues to invest even more, driven by the enjoyment it offers.
My Favorite Index Funds
I'd like to share my personal preferences for index funds.
Here's the rundown.
Option #1
The simplest option among them is a broad stock market index fund like VTSAX or FZROX.
This covers the entire US stock market, and for most investors, it could suffice as a comprehensive choice.
With this, you achieve diversification across numerous companies, making it inconsequential if a few underperform.
Historically, it has performed well and offers a straightforward one-fund solution.
Option #2
In addition, due to my inclination toward a more daring approach, there's the S&P 500 index fund like VFIAX or FXAIX, which targets—you guessed it—the S&P 500.
This carries slightly more risk as it condenses the broader market down to the top 500 US companies.
However, the performance of these top 500 firms has been exceptional.
While it's uncertain if this trend will continue over the next several decades, I'm comfortable taking that risk, placing my bet on the sustained growth and expansion of the US economy.
This could be an appealing option for those aiming to be part of that growth.
Option #3
You can also explore additional options, such as an international index fund covering markets outside the US—examples include VGTSX or FSPSX.
International index funds like these have exhibited relatively stagnant growth over the past decade, as the US market has outperformed others.
However, it's important to remember that past trends aren't indicative of future outcomes.
There have been instances throughout history when international index funds surpassed the US market, like during the 1980s and 2000s.
Even if international funds don't outpace the US for now, they often offer slightly higher dividends.
While I wouldn't recommend going entirely into this category, allocating around 15 to 20% to your holdings in these indexes might be beneficial.
Option #4
Moreover, you can diversify further with options like real estate using VNQ or focus on technology with VGT.
Although I'm mentioning Vanguard funds, you can use any brokerage to your liking.
By incorporating these options, you achieve comprehensive market diversification, bringing you closer to your $100-per-day objective.
This strategy entails setting up these investments on autopilot, preferably within a retirement account.
Contribute as much as you can and then patiently await the transformation into a "money tree."
I want to emphasize that this isn't an overnight thing or something that yields results within a few years.
However, it's a path that practically anyone can embark on almost immediately, regardless of their financial resources, time availability, skills, or effort.
This approach remains one of my preferred and simplest methods of generating truly passive income without requiring any hands-on involvement.
- Ivan