Want to Know How to Invest Better Than Experts? Four Reasons to Invest in ETFs
“He told me don’t rush to get grown, drive slow, homie” — Kanye West (Drive Slow)
So you want to try out this investing thing, but you’re unsure of how to start or where to go. Take your foot off the gas for a second. Drive slow. Get out the left lane. No need to bang through extensive stock analysis to create your own well-diversified and tax-efficient portfolio. Save your time and energy.
If you’re at that level of knowledge and have time to research stocks, go and knock yourself out. But if you’re not at that point, there are some great alternatives. I talk about Stash and Acorns in an earlier post. In my last post, I encouraged you to get your feet wet as quickly as possible. And I’m dead serious. You can start investing right. Like the moment that you finish reading this post!
Maybe you went on the Stash or Acorns website and didn’t fully “get it”. You’re investing in this thing called an exchange traded fund (ETF). But what exactly is it? There’s plenty of literature out there about ETF’s, but I’ll try to give you a less jargony description of what an ETF is and why they’re such attractive investments for new investors.
But first, why exactly should you care about ETFs?
In one of Warren Buffet’s famous annual letters, he bet $500,000 that no investment pro could choose a set of at least five hedge funds (a fund that invests according to principle of “high risk, high reward — for the super wealthy) that would beat the performance of an S&P 500 Index Fund over a ten year period. What happened? The S&P returned 85.4% and hedge funds returned 22%. Hedge funds are run by “experts”. More about that bet here. Apparently, slow and steady wins the race.
ETF’s are nothing more than index funds. A sum of money provided by investors that track a group of assets or “things of value”. ETFs investors typically trade with one another opposed to dealing through a fund manager who charges management fees. You can invest in an ETF that mimics the S&P right now. So what are you waiting for?
When folks bring up ETFs, they usually also bring up mutual funds. Both are diversified (spread out over different assets to reduce risk) and managed groups of securities that are divided into shares that aim to match the performance of an index. There are a few key differences between ETFs and mutual funds that are a bit more technical (explanation here), but the major difference is that ETFs are cheaper to own. And they’re cheaper for a couple reasons.
- They have lower management fees
- They don’t get taxed as much
So Why Should You Invest in ETFs?
- You’ll keep more of your profits
- You don’t have to worry about researching hundreds of companies to invest
- It’s way cheaper to invest in an ETF than to individually hold shares of its underlying assets.
- Over time, ETFs give a pretty hefty return — regardless of market crashes, historically stock market indexes have risen nicely over time
They’re a great place to start for investors who want to start making returns. You don’t have to start out as a sophisticated investor. It’s a process. You can literally get started with five bucks.
Driving slow doesn’t mean that you should drive at all. Keep the gas running.
What are your biggest hesitations when it comes to investing? What would it take for you to take the next step? For folks already investing, what have been your biggest lessons?
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