Unlock the power of the entire stock market
Imagine if you could buy a little piece of every large company in America, or the United Kingdom, and benefit from the hard work and ingenuity of some of the best minds in business. Wouldn’t that give you a pretty good chance of long-term success?
Surely that’s not possible, though? Thankfully, a bunch of clever finance boffins in the 1990’s came up with exchange-traded funds (or ETFs) so that passive, indexed funds could be made available to individual investors.
These are low-cost funds traded on the stock market, without the need for costly fund managers, allowing you to invest in entire geographic regions, industries, investment strategies or areas of interest.
Most people don’t want to get too involved with choosing or keeping track of their investments, or they simply want to minimise risk through diversification. ETFs offer the best of both worlds: exposure to the long-term gains of the stock market, yet with significantly less time required to monitor your lower risk portfolio.
Even the most well-known investor of all time, Warren Buffett, endorses a simple portfolio of low-fee index funds. When asked what advice he would give to his relatives about managing his estate, Buffett replied:
“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”Warren Buffett
Now, a 90/10 split of stocks and bonds won’t suit everyone’s risk tolerance or time horizon; you should always modify this kind of advice to suit your personal circumstances and financial goals. The interesting thing here is that one of the most successful investors of all time, who has made a career out of picking stocks and buying companies, recommends a passive approach to investing.