If we don’t have time to plan our investments, nor do we have the knowledge to diversify or look for companies that give us satisfactory rates of return…What can we do? One of the products that I personally find more complete (and simple) that has grown dramatically in recent years are ETFs.
Buying time, money and knowledge
If we want to invest in listed companies, but we do not know which companies to choose or which time is the right one and we also have only a little money (relatively speaking), we can spend a few hours of our lives to understand how ETFs work. ETFs are investment funds that are comprised of several shares replicating an index.
For example, there are ETFs that replicate the S%P 500, or a specific sector such as the energy, tech, or manufacturing sectors. There are also ETFs that filter companies whose dividend has been growing in the last 5 years, or companies whose stock market variability is lower than the rest (low volatility indices).
The first thing we have to consider is to look for a serious, reliable and honest manager, who correctly manages the ETF and whose deviation (ETF) with the underlying index to replicate is minimal.
In this way we can invest in an index, a sector, or a group of companies that meet a certain characteristic quickly, simply and cheaply, diversifying and reducing the risk of each company without the need for knowledge.
Is the stock market always profitable in the long run?
Generally, if we chose a portfolio of several developed world indices, in the long run it would have been appreciated considerably.
However, by buying several ETFs we can diversify enough to maintain capital in the long term, for example by choosing ETFs that select the companies whose dividend has grown over the last 5 years, an ETF that replaces the US stock market, another that replicates The European etc.
The minimum amount to invest in an ETF is the share price, which is usually low, without requiring large amounts of capital. The fees depend on the manager, but they usually fluctuate around 0.30% per year.
What strategy to follow to invest through ETF?
Once we have an open stock account in a broker that has ETF products to offer, we need to be able to contract them.
If we do not have time to manage our investments, one option is to buy a fixed amount of money periodically, for example $500 or $1,000 or whatever we can afford. It can be monthly, quarterly, annually … Thus we will avoid entering all our money in a market peak, or when there is excessive optimism, and we will not be afraid to enter very pessimistic markets when in the press announce that the market is going to hell.
This type of trade requires patience, and a long-term investment. By investing in certain time slots, we can take losses for long periods of time if the market is bearish, but we will buy more shares as they are worth less (keeping the fixed investment amount). It is not especially the strategy that motivates me most, but for someone with limited knowledge and with little time but wanting to contribute to equity a part of their capital, this can be a viable strategy.
We can also opt for an ETF that reinvests dividends, so that we get the compound interest effect.
The bullish bias of the indices
Another aspect I like about ETFs is that stock indices have a bullish bias, what does this mean? Since in the stock indices companies enter and leave according to some parameters, the ETF generally takes into account the market capitalization among other factors. This implies that companies that do worse (losing more market capitalization) will leave the index, and others will enter that are doing better. This is a very important factor to take into account in the long term investment.