Index Funds: What John Oliver Left Out

Last Week Tonight With John Oliver is just a glorious show. This Sunday’s show was no exception.

If retirement accounts and fund choices scare you, that video is a fantastic introduction to investing that touts the benefits of index funds and the dangers of non-fiduciary financial advisors.

The thing is, I was an index investing convert even before I joined the working world, and I was still completely confused when it came time to choose investments for my 401k. As Fluffster now holds a Bachelor of Financial Advising (you can too, just click that link ;), here is a hopefully-straightforward supplement.

Fluffster Finance Certificate


If for some reason you haven’t watched this Sunday’s Last Week Tonight, or otherwise do not know much about investing and index funds, this section is here to help you.

Be average.

While there may be some people that consistently make good investment choices (looking at you, Warren Buffet – who of course reads my blog), the vast majority of us just can’t, including many who are literally paid to figure this stuff out. Some financial advisors are glorified salesmen that profit from pushing certain funds.

We humans are also incredibly emotional and can’t be trusted to use logic – even analytical engineering types like Fergus and me. We actually bought our first individual stock a few months ago after a major dip: Tableau company stock. It is by no means a large part of our portfolio, but man was I anxious at first! I’ve cooled down recently, but I was checking that stock every day for a while, wondering if we should not have bought it, if we should have bought more, if we should have bought it earlier or later,  when we should sell it…so much stress over a tiny part of our portfolio. I would be a completely different person if I actively managed our entire portfolio.

But you don’t have to stress and research and pick winners – just pick all the stock! By investing in lots of different companies, or even most of the publicly traded companies, you can get average market returns. Index funds do this for you by buying a piece of every part of the market in a giant fund that you partially own. By buying a share (or even a partial share) of an index fund, you own a little bit of every stock within that giant fund. Magic!

As a final note – index funds are not always labeled as such. It took me a ridiculously long time to realize that index funds are mutual funds.When you buy a mutual fund, you’re essentially buying multiple stocks (or bonds or other investment vehicles) at once. Mutual funds allow ordinary investors the ability to easily diversify, to not have all their proverbial eggs in the basket. Index funds are mutual funds that are not actively managed and follow an index of some kind – The S&P 500, for instance, or even the total US stock market. Index funds have lower expense ratios, meaning they cost less to own each year.

How to Be Insanely Smart and Know Terms Like Asset Allocation

Asset Allocation is a fancy word for a simple idea. Your investments? Those are assets. Their allocation? Simply the makeup of your investments. That is, what different things do you own, and how much? Basic asset allocations involve percentages of stocks and bonds, such as 90% stocks, 10% bonds.

Asset Allocation is important because of risk tolerance and uncertainty.

There is no magic allocation that is better than all other strategies looking forward. We can look at the past, sure, but past performance is not a guarantee of future success. Seriously y’all, if anyone tells you differently, you should ignore the next words out of their mouth. They probably also have horrible taste in food and you should judge them.

Accept that you are not entirely rational and learn your limits. Stocks have higher historical returns, but they also have a higher chance of losing value in the short term. This is why high stock allocations are typically suggested for younger people who are farther away from retirement, and retirees are advised to have more in bonds.

The worst single day in the US stock market’s history? Black Monday – October 19th, 1987. A loss of 22.61%. If you started out with $100k that morning, all invested in a total stock market index, the account would be worth $77.39k at the end of the day. Just think about that – would you be watching during the day? Would you feel the need to sell before the market bottoms out? Would you be panicking?

Fluffster would. That is why he invests only in stuffed animal futures.


Allocation Examples

Everything in this article is about the basics. So, dear readers, I offer you a spectrum, based on your risk tolerance, and using the simplest and easiest to understand indices (with a huge United States bent because, well, that’s all I know).

Basic Ingredients

Total US Stock Market Index – All the stock [Examples: Vanguard’s VTSMX, Fidelity’s FSTMX, Schwab’s SWTSX (Schwab’s US Broad Market SCHB is pretty close as well)]

Total US Bond Market Index – All the bonds [Examples: Vanguard’s VBMFX, Fidelity’s FTBFX, Schwab’s SWLBX]

100% Total US Stock Market Index

For the risky or very young. It comes down to this – On average, stocks make mathematically more sense than bonds over the long term. There’s still risk, but if you are not living off your investments (or about to), 100% stocks can make sense, as long as you can weather the ups and downs of the market.

Your age in bonds

For the worriers. John Bogle‘s famous advice is “roughly your age in bonds,” meaning 40% bonds at age 40, 50% at age 50 and so on. To us, this seems a little too conservative, but hey, it’s better than losing value in a savings account.

Something in-between

Jump ahead to the “Extra Credit” section for some suggestions on where to start.

401k Weirdness

My company’s 401k provider is Fidelity, meaning I immediately keyed in to their Spartan lineup of funds. [03/09/17 – these have been renamed to simply “Fidelity®” funds]

That is, after being scared and confused and holding on to a Fidelity Freedom expected retirement age fund (so pricey!)…

We don’t all have access to the same funds in our companies’ retirement plans. Fergus has 20 options available, for example, whereas I have a whopping 186 to choose from. And what if you don’t have a total stock market or bond market fund available to you?

How to DIY the Total Stock Market

The total stock market, unsurprisingly, has a lot of components. There are some other common indices that can be used to cobble together the total stock market. Below is the most common in our experience, and more complicated examples can be found here.

S&P and Friends

The S&P 500 index is very popular, with a mix of large and mid cap companies. If you have only one index available to you, it’s probably this one. Even just by itself, you get a lot of diversification. To better approximate the total market, some more funds will be needed to capture the smaller companies.

Approximate Proportion of the Total Market
S&P 500 Index 81%
Extended Market Index 19%

Target Retirement Age Funds

There are also some target retirement date funds that are not as expensive as Fidelity’s (always check the expense ratios, folks!). These funds have a pre-set mix of stocks and bonds based on your target retirement age that change over time. Just be aware that the expense ratios are typically higher than if you were to DIY. Vanguard’s series is a good choice, or a good comparison if you don’t have the option.

Force Change

If all of your options have at least a 1% expense ratio (over 10x more than many index funds!), or you’re charged a fee every time you buy or sell within the account, why not change the system? We use Vanguard for our non-retirement accounts, and they have a page dedicated to helping set up retirement plans for small business owners. Let me know in the comments if you have personal experience with other providers as well.

Extra Credit

There is a lot that I have not touched on in this post – international funds, for example, for greater diversification. Here are my recommendations if you really want to read more about these topics.

BOOK:  A Random Walk Down Wall Street

Fantastic read and one of the first things I read to learn more about this topic.


To really get into the nuts and bolts beyond simply not making stupid mistakes and losing $$ on high expense ratios / expensive yet mostly useless financial planners that only want to sell you things, check out the Bogleheads Wiki and Getting Started Guide.




Want to simulate your retirement and see how likely it is that you would become destitute based on historical data? And then adjust all the variables to see what changes? Just me?

Personal Capital [Affiliate link – support the blog!]

This is what we use to make sure we understand our asset allocation across multiple accounts. They also have some great tools that show you how your portfolio would historically perform.

What have you learned in your investment journey? What is still a mystery to you?
More importantly, are you a certified Elf-Spotter yet?

3 thoughts on “Index Funds: What John Oliver Left Out

  1. WSJ says: “Nobel laureate Eugene Fama and Kenneth French wrote a comprehensive paper on this subject which found only about 2% of the 3,156 fund managers they examined had statistically significant evidence of skill. They also concluded that a portfolio of low-cost index funds is likely to perform about as well as a portfolio of the top 3% of actively managed funds (and better than the other 97%).”


  2. I’m currently lying to my company to say I’m more risk averse than I am. It’s practice while I have so few assets. I’m 93% stock and 7% cash and other. I have a long time-line and started late. Volatility is a thing to get used to, but I’m hoping that it will be worth it.


    1. I need to check with my notification settings – only just now saw this comment!

      As long as you can stop yourself from selling low, you can likely train yourself to be less risk averse. It’s like you said – it takes practice. Practice and a good basic knowledge of the numbers. 🙂


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