I’m 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 haven’t 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 I’m missing something. Is anyone able to highlight what I might be missing and also suggest any good ETFs to start out with?
I guess one is the EFT is spread into many areas where as a single stock is just one. I’m also a newbie
There’s an opportunity cost to picking stocks. To my mind, it’s worth paying 0.15% ish to Vanguard so I don’t 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 portfolio’s 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.
I’m 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.
Here is a discussion you can read to help get you started. The key takeaway is to not over complicate it and keep fees low. Passive Investors - ETF Portfolio Discussion
@Emmie … I’ve been investing for under a year.
I started out buying single stocks … some good choices, some not… I soon learnt that my investment strategy was pretty risky & not diversified.
I’ve since worked on adjusting my entire portfolio. I’ve 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. I’m only 5 months in and like @Optimisery I’ve 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, it’s 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 £246.88 per share. I don’t 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.
This is probably the simplest summary I can give:
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, you’ll learn a lot…might take a few hours though! But there is a wealth of information on it.
Listen to Michael Filighera’s analysis for the S & P 500 update as to the direction of the markets.
And the Nasdaq 100
With etf investing and depending on your ambition, the advanced way is to build a core portfolio of etf’s and build up significant amounts which can then support part or most of your intended lifestyle.
Currently you’d require £1,000,000 invested to draw 4% out without actually touching the £1 million, for an income of £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 £1 million by salary, property, online business… anything at all though you’d need to bring in outsized incomes to throw chunks at your etf’s to get them to £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 etf’s 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 ‘sacrifice’. Living intentionally for that time period with a direct target to hit.
It’s the ‘finding a company that performs well and gives a good return’ that’s hard if not impossible to do consistently. Easier to buy a broad ETF and trust that the quality stocks are inside it.
There’s 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 that’s 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). There’s also some active decisions that need to be made about country weighting and what not.
With that said I think it’s obvious that indexes will outperform 99% of individual investors anyway. Like the vast majority of stock market gains since the 1930’s were made by 4% of companies. That means that if you were to buy a basket of individually picked stocks randomly there’s a 96% chance statistically that you would get 0 returns. And there’s 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
And also that form of “technical analysis” is regarded by many as not too different from astrology.
It about having exposure to a sector.
If you know a sector is going to be the in fashion then it’s worth just buying the ETF rather than picking exact winners
“A rising tide lifts all boats”
Example, there is an Airlines and Cruises ETF (I think that’s what it’s called) which was great when lockdowns were eased. Probably still could be.
If you think “agricultural sector” will do well then you buy the S&P agri etf.
However, it’s worth looking at the holdings within the ETF also. If most of the companies in an ETF are in China then you’d be getting spanked right now.
I prefer ETF’s to start with, then research winners and buy those individually - that way I’m 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 I’m 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. It’s just my 2p worth though.
Can you elaborate and give some examples where you picked mutual funds over a specific ETF(s)?
This isn’t me questioning your strategy by the way. Your comment has just grasped my attention as I invest ~30% in ETFs.