It was April 2014, I was six months into university and determined to get great grades so that when I graduated I’d land a dream job. I’d studied hard over Christmas and performed well in January exams, and I was busy preparing for the summer exam season, I’d even secured additional programming labs as the academic rep for our course so I could improve my grades.

But then in the lecture hall, our professor shared that someone on our course had a summer internship.

Wait, what?

I hadn’t even thought about my plans for summer, let alone a summer internship.

Can we get internships in our first year?

Our professor told the class how this guy on our course had completed a Spring Week at J.P. Morgan a couple of months ago (what’s a Spring Week?) and through good performance there he’d secured a summer internship in the Technology division at J.P. Morgan.

I slumped at my desk and felt a sinking feeling in my stomach. I’d been working hard at getting good grades, blind at the fact that there was another game that others had been playing, putting their energies into getting internships. I felt neglected, uninformed, frustrated and disappointed.

I’d been playing the wrong game, and I saw a dream job at graduation already slipping away.

Lost in a sea of investments

Many of us are all too familiar with a similar feeling of grief when it comes to managing our money.

From a young age, we’re taught to work hard, get a good job, save money, buy a house, and then wait around for retirement.

And if we’re fortunate, we find out early in our lives that there’s more we can do with money than save it as cash and pay our mortgage with it and we enter into the world of investing.

But if we’re unfortunate, we’re busy working away for years without this knowledge, and our future prospects suffer as a result.

I’ve gone through this journey myself.

When I was 7, my parents introduced the concept of savings accounts, where I would put my birthday and Christmas money into this account which would have balances stamped in ink into a little blue book and I’d see this magical thing called “interest” that would give me an extra £100 every three months.

When I was 18, I discovered investment funds, diving deep into many books on the topic from trading stocks to actively managed funds, discovering bloggers like Mr Money Mustache and The Mad Fientist who had retired thanks to their investments funding their living expenses. And through a lot of research, I landed on what’s now considered common knowledge in the industry: the most reliable way to generate wealth over the long-term for the average person who isn’t a professional trader is to buy and hold an index fund. An index fund is simply a set of stocks, in the case of the S&P500, the stocks of the 500 largest companies in America. By buying the fund, you own a little bit of these 500 biggest companies from Apple to Walmart, Amazon to Wells Fargo, and your investment increases in value as millions of people go to work to develop new technologies and make these companies more profitable.

So here’s the answer to financial success. Go and buy the stock ticker VTSAX, the fund that represents the S&P 500, keep buying as much as you can afford for as long as you can, and then when you’re ready to retire, you’ll have far more money than you’ll ever have imagined is possible.

Unfortunately, our story doesn’t stop there.

While investing is simple, it isn’t always easy.

Going back to 2017, my friend from Microsoft had plowed his savings into Bitcoin and I’d made it my personal mission to get him to sell this speculative asset and invest in index funds instead.

I convinced him that relying on more people to buy Bitcoin in future to ensure it increased in value over time was akin to gambling, and fortunately he cashed out, opened a Vanguard account and invested in low-cost index funds.

But the story didn’t end there.

April 2020 came around. He’d been holding his index funds for a couple of years and COVID-19 had just hit. We were trapped at home, anxiety levels hit an all time high, and the stock market had dropped 40%. My friend was overwhelmed and saw his investments plunging at exactly the moment the world was falling apart. He’d stopped his regular investments from his paychecks, and was close to selling his index funds all together and going back to cash.

He needed to de-risk.

When he’d invested in index funds, he thought his comfort zone was large enough to handle the risk.

But the market crash of COVID had just taught him his comfort zone was rather smaller than he’d thought.

And he felt he had no choice but to sell his investment and go back to cash.

He’d invested $20,000. That $20,000 was now $12,000, and it was continuing to drop. It might become $10,000, $8,000, who knew where the bottom was.

Fortunately, I knew that investing is a lot less about facts and numbers, and a lot more about managing our mindset.

And with my encouragement, he reflected on how he saw his investments.

He reflected that he was acting from an emotional place, based on the state of the world around him and not the fundamentals that index funds always recover in the long-term.

He reminded himself that the long-term gains come at the price of short-term drops, and this uncomfortable feeling of the index fund being down 40% was the price he had to pay if he wanted the long-term results.

He realized that he’d been letting the day to day prices on the screen affect him emotionally when they shouldn’t have. He didn’t need the investments today, he needed them in a couple of decades for retirement, so these moves were irrelevant.

And as a result of reflecting and better knowing himself, his comfort zone had increased.

Now he was comfortable to hold onto his index funds. He still holds them to this day. And he’s in a much stronger position having weathered this storm and learned about himself in the process.

It’s a lesson for everyone. We acknowledge the facts and tell ourselves that when the index fund drops 40% we’ll be fine. But what will happen when it actually happens?

Index funds are the best way to build long-term wealth.

But they’re also a great way to lose half of your wealth if you can’t handle them.

Make sure you have the right mindset to make index funds work for you.

So how much should we invest in an index fund? Let’s find out.

Where we’re at on the journey:

One reason we delay investing ✅
Buying index funds isn’t enough ✅ [this post]
Emergency fund – protect your investments
Short-term savings – plan responsibly
Calculate your savings rate – calculate your FIRE number
Personal finance flowchart – learn how to invest effectively