A millionaire who retired at 36 and invested in 9 index funds shares how one would have yielded him an extra $680,000 if he had picked it instead — and the funds he's decided to sell (2024)

Schneider dispersed his money across nine index funds including those that track US stocks, small-cap stocks, US and global real estate, international and emerging markets, commodities, and Treasuries. He then patted himself on the back for what he thought was an educated move before proceeding to enjoy retirement. But after a year went by, boredom hit.

"I did what I thought people were supposed to do when they had enough money and did not need to work. And so I traveled and played video games and just had fun all the time," Schneider said. "But after a year or so of that, I felt empty and wanted to work on something and help people."

In 2019, he started a passion project called the Personal Finance Club, a website that offers free and paid content about index fund investing. The mission to educate others helped him learn valuable lessons about his choices — one of them being the value of simplicity.

He learned about target-date funds, which pool a basket of individual funds designed to rebalance the securities based on your years to retirement. Instead of picking and choosing stocks and bonds, one fund can diversify and rebalance itself based on the number of years you have left to retire or when you'll need the money. As the fund approaches that date, it reduces risk by allocating a higher weighting towards bonds.

He had been curious about whether he made the best investment decisions. So he decided to compare different funds to determine which may have performed best. Using Portfolio Visualizer, Schneider plugged in the initial amount invested in 2015 of $2 million in the nine funds he held to reflect the exposure by percentages. Then, he compared the result to having 100% of the amount invested in a target-date index fund called the Fidelity Freedom Index 2050 Investor (FIPFX). To his surprise, his separate funds vastly underperformed by about $680,000.

"If I could go back in time, I would dump every penny to my name in a single target-date index," Schneider said.

There are also psychological benefits to a target-date fund, he added: it removes the temptation to trade or change your strategy.

Below is a breakdown of the funds Schneider initially invested in.

Below is a graph that compares how the funds performed over time, with the target-date fund yielding higher returns.

Below is a table that breaks down the starting balance of each position versus the ending balance. The nine separate funds had a return of about $3.1 million. The target-date index fund returned about $3.78 million.

The $680,000 is based on a theoretical scenario for both funds with no additional deposits or withdrawals since 2015. In actuality, Schneider said he withdrew about 2% annually from his real-life portfolio, a ratio that avoids depleting his principal.

"Any withdrawals would've impacted both the portfolios. There's no difference in terms of all the funds mentioned here," Schneider said. "The nine versus the one have no transaction fees, have no early withdrawal penalties, anything like that. And so it's safe to assume they would've impacted the two compared portfolios equally."

He has since sold the Invesco DB Commodity Index Tracking Fund (DBC) from his portfolio because he believes commodities are based more on speculation rather than fundamentals. He has also sold the iShares TIPS Bond ETF (TIP) because it's too conservative for the number of years he has left to retire. And finally, he sold the iShares International Developed Real Estate ETF due to a high expense ratio.

According to his Fidelity account, his funds now sit at about $2.6 million. He's now investing in FIPFX through a Health Savings Account.

Target-date index funds have a few drawbacks, though. One of them is that they have higher fees. But critics are likely referring to the actively managed version of those funds, he said. For example, FIPFX has an expense ratio of 0.12%, which is extremely low, he said. However, its non-index-fund counterpart, the Fidelity Freedom 2050 Fund (FFFHX), has a 0.75% expense ratio. So it's important to pay attention to the version you're picking, he added.

Additionally, holding a target-date fund in a regular brokerage account instead of a tax-advantaged account may not be tax optimal. If there's a capital gains distribution, it could trigger a taxable event. But Schneider believes that even in that scenario, it's better than the cost of underperforming by trying to pick and choose.

Finally, many investors believe target-date funds are too conservative. But if you want yours to be more aggressive, pick a later year, he said. For example, instead of a maturity year of 2050, you could choose 2060 and keep it more aggressive for longer, he added.