Investing with ETFs is one of the cornerstones that has allowed me to achieve financial independence. That’s why it’s time to share the general rules I use to buy ETFs and make my financial investments. It took me many years of study and countless books to reach these conclusions.
Note: what works for me might not work for you, as we are always in the realm of personal finance. The world of investing is not a zero-sum game: when one person gains, another loses. However, the questions I have asked myself and the problems I have had to solve during my investment journey are common to most investors.
Ego in the Enemy
In finance, as in life, ego is our worst enemy. You need to try to set aside your ego or at least be able to manage it, as it can be very costly. First, you need to ask yourself what kind of investor you want to be.
Do you prefer an active or passive management of your investments? In other words, do you consider yourself smarter than others and think you can beat the market?
The approach I use, both in my business and when making my investments, is to always have the odds on my side, trying to set emotions aside.
To answer this question in the investment field, you can simply look at the SPIVA Scorecard. This sector involves a lot of money and the most brilliant minds are at work; I can assure you that there is no shortage of reliable studies and research. SPIVA is a periodically published research by Standard & Poor’s that measures the performance of active managers against benchmark indices, such as the S&P 500.
For example, over a ten-year period, 87.42% of active funds have underperformed the S&P 500. For other asset classes, the percentage goes up to 90%. It goes without saying that for an average investor, it is very difficult, if not almost impossible, to select the “winning” stock.
Only a few have managed to beat the market in the long term. They are counted on one hand. Here are my GOATs (The Greatest of All Time):
Their stories should be studied thoroughly because they are actually much more complex than a superficial data analysis might reveal. Things are never exactly as they seem; even though some of them have actually beaten the market, many of their clients (investors like us) have not. I will prepare in-depth articles on this topic in the coming months because it seems very fascinating and not well known.
The Efficiency of Financial Markets
I believe that financial markets are extremely efficient and think that the economic theory proposed by Eugene Fama in his well-known 1970 paper Efficient Capital Markets: A Review of Theory and Empirical Work, which states that asset prices reflect all available information.
I don’t think there is much room for extra profits; moreover, the effort required to gain even a few percentage points more than the benchmark is not justified by the time and capital invested. And in any case, even if there were opportunities, they would last for a very short time before being exploited by other operators as well.
As a result, I have concluded that I am a passive investor
Even the father of value investing, Benjamin Graham, who unfortunately passed away in 1976, was already suggesting a sort of passive management by the late 1960s. Graham was the author of one of the most famous financial books, The Intelligent Investor, one of those books that everyone should read at least once in their life, and who inspired Warren Buffett.
Graham said that Wall Street was now full of analysts doing excellent work, and finding undervalued stocks was becoming increasingly difficult. For an investor, earning “a fair” return in the stock market was extremely easy: just buy 10-15 major Dow Jones stocks to achieve a good return with minimal effort, in line with the average of the largest corporations and thus the market average. To achieve even a few extra points, however, required a great effort and a lot of work, with uncertain results. Furthermore, the extra effort was not at all rewarding if the capital on which to apply it was relatively small.
Investing with ETFs Today
As mentioned, back then it wasn’t possible to invest with ETFs, so Graham talked about major Dow Jones stocks. Today, thanks to ETFs, you can replace the entire index with these major stocks. And not just the Dow Jones, which consists of 30 stocks, but also the S&P 500, which has 500, or the MSCI World, which includes even more, and not just American ones.
Investing with ETFs, therefore following a passive management approach, is definitely the way to go for those with a long-term perspective and who want to achieve financial independence.
With this first filter, we’ve already made a significant step forward in choosing our ETFs; in the next article, we’ll start the research.
On avance !
