Iām fairly new to investing and so far have stuck to fairly well established companies. What I see a lot of you doing is putting your money into ETFs, I havenāt up until now, as the fees have always put me off. I take the view that I could invest in a company that performs well and get a good return with no fees.
However the fact so many of you invest in ETFs has made me think Iām missing something. Is anyone able to highlight what I might be missing and also suggest any good ETFs to start out with?
Thereās an opportunity cost to picking stocks. To my mind, itās worth paying 0.15% ish to Vanguard so I donāt have to spend my time reading company annual reports and so on. With a set-and-forget passive approach, I find it easier to buy and hold long term.
Lots of studies also show that most people are better off just buying the market and guaranteeing that return than trying to beat it.
That said, I do have some active investments but, again, I prefer collective investments. I figure that the likes of James Anderson, Tom Slater and Lawrence Burns know far more than I ever will about picking growth stocks, for example.
ETFs should be the backbone of all portfolioās in my opinion.
Why invest into one company when you can lower your risk and invest into multiple stocks?
Take the S&P500, by buying an ETF in this index you will invest into 500 of the largest companies in America (and most likely the world!) and an index which returns on average 10% per year. If one stock does poorly, the impact of that it reduced by the stocks that are doing well. The iShares ETF (IUSA) charges 0.07% fee (I think) which is very low compared to the potential returns of the ETF.
Iām now 80% invested into ETFs and 20% individual stocks
Most ETFs have very low fees (most under 0.2%, some even as low as 0.03%). So it is a small price to pay for diversification. Like others have said, you can buy the top 500 stock in US or top companies in the world for a small fee without the hassle of managing so many stocks.
@Emmie ā¦ Iāve been investing for under a year.
I started out buying single stocks ā¦ some good choices, some notā¦ I soon learnt that my investment strategy was pretty risky & not diversified.
Iāve since worked on adjusting my entire portfolio. Iāve gone from 100% single stocks to 65% Index funds & ETFs / 35% single stocks. I plan to get this down further.
A good starting point would be something like VWRL (an all world index tracker 3,800 stocks) or S&P 500 (top 500 US stocks).
Thanks everyone, this is really helpful. Iām only 5 months in and like @Optimisery Iāve made some good and bad choices.
As my portfolio grows I have been thinking about ETFs and also noted their popularity, which has made me think that my avoidance of the fees has been an error. This is all food for thought and I think I will go for something like the S&P500 to start out with. I also noted in an earlier post @Optimisery you have ishares robotics, itās 8% down just now and I think that sector has a big growth potential long term. Might be another one to buy while all the tech stocks are down.
QEEE etf which represents the Nasdaq 100 and is currently Ā£246.88 per share. I donāt think you can buy a fractional share in this one.
VUSA the vanguard etf for the S & P 500 .
There other vanguard ETFs on the FTSE 100 and others.
What the chart is showing is comparing how different sized portfolios of randomly selected stocks perform compared to the market (50%).
The smaller the number of stocks the greater the chance of significantly outperforming (>70%) and underperforming (<30%), but the key thing is because stock returns are skewed the underperformance dominates - you are more likely to underperform the average.
ETFs are a simple way to get all the benefits of diversification for a fairly low cost.
I have around 6 different sector ETFs but they only make up a small percentage of my total ETF/Fund holdings. I think Robotics & Automation is less than 1% of my total ETFs.
But yes, in the long term I hope it will perform
If you get chance to read through the thread link @J4ipod94 posted, youāll learn a lotā¦might take a few hours though! But there is a wealth of information on it.
With etf investing and depending on your ambition, the advanced way is to build a core portfolio of etfās and build up significant amounts which can then support part or most of your intended lifestyle.
Currently youād require Ā£1,000,000 invested to draw 4% out without actually touching the Ā£1 million, for an income of Ā£40,000 per year.
This approach can have an allocated percentage to satellite investments like trusts, mutual funds and individual stocks to add growth options.
Can be achieved by incredible sacrifice at a young age to build that Ā£1 million by salary, property, online businessā¦ anything at all though youād need to bring in outsized incomes to throw chunks at your etfās to get them to Ā£1 million.
Purchasing two properties 10 years ago & having them rented and seeing them double whilst placing 50% of your salary AND side work into solid etfās would probably have got you there.
The idea is to live cheap and earn big. So earning a UK income whilst living in Thailand running an online business and being able to save 80% of your income can also get you there.
The key word here being āsacrificeā. Living intentionally for that time period with a direct target to hit.
Itās the āfinding a company that performs well and gives a good returnā thatās hard if not impossible to do consistently. Easier to buy a broad ETF and trust that the quality stocks are inside it.
Thereās plenty of issues with the current indexes we use in my opinion. Chiefly, market cap weighting. It was used to reduce tax implications and costs but nowadays thatās not so necessary anymore and you can have pretty cheap equal weight funds (although maybe not quite US vanguard cheap). The thing is equal weighting has been shown to historically outperform market cap weighting (which makes sense to me, since it results in a smaller overall market cap for your basket and more runway for gains in the companies). Thereās also some active decisions that need to be made about country weighting and what not.
With that said I think itās obvious that indexes will outperform 99% of individual investors anyway. Like the vast majority of stock market gains since the 1930ās were made by 4% of companies. That means that if you were to buy a basket of individually picked stocks randomly thereās a 96% chance statistically that you would get 0 returns. And thereās also been studies that suggest random stock picking actually does better than individual investors
For a long term investor these short term technical forecasts matter very little. They also encourage behaviour which can detract from performance such as trying to time a market. Regular investing with a small cash allocation for large dips will suffice for the majority of investors
If you know a sector is going to be the in fashion then itās worth just buying the ETF rather than picking exact winners
āA rising tide lifts all boatsā
Example, there is an Airlines and Cruises ETF (I think thatās what itās called) which was great when lockdowns were eased. Probably still could be.
If you think āagricultural sectorā will do well then you buy the S&P agri etf.
However, itās worth looking at the holdings within the ETF also. If most of the companies in an ETF are in China then youād be getting spanked right now.
I prefer ETFās to start with, then research winners and buy those individually - that way Iām not rushed or pressured into panic buys.
I actually think most people would be better off with mutual funds rather than ETFs because the latter are by their nature much more tradable.
Each to their own but Iām not a fan of thematic ETFs. For me, they go against the initial idea of a passive tracker which is surely to provide cheap, broad exposure and guarantee the same return as the wider market. Itās just my 2p worth though.
I soon learnt that my investment strategy was pretty risky & not diversified.
