A smart investing strategy can be summed up in one sentence: Invest in a broad market ETF with a low expense ratio and then forget about it. Yet There are billions and billions of dollars spent on an industry to guide people into making the “right” financial decisions. There are a few reasons I believe why it appears so complicated and why so many people pay someone else to help them with manage their money.
It actually is very complicated. The day to day movement of stock have myriad forces driving them. Often sharp movements have no obvious explanation at all. High frequency trading by computers is happening faster than you can refresh the stock price in your browser. Public earnings calls are analyzed word for word to make predictions on future stock performance. There are many companies making a lot of money using these various strategies on the stock market. But there is a secret: It doesn’t matter. The people who analyze stock prices all day every day rarely make more money than someone who invests in a generic S&P 500 ETF and then ignores the account for years.
If it’s so easy to make solid returns yourself then why are people still getting paid to manage your money for you? I suspect part of the reason is many people actively managing a portfolio are making money too. This is because in a strong bull market like we have been in the past few years it’s hard NOT to make money. Let’s say a year ago you sent all your money to a broker to invest. Today they give you a note saying they’ve increased your money by 10%. To the average person that would sound pretty great! What your broker won’t tell you is if you had invested all your money in the S&P 500 directly and then left it alone you would now be at 15.7% gains.
I suspect the media and entertainment industry also play a role in making people feel uneasy about investing for themselves. Any movie about wall street usually depicts businessmen in suits making high stakes investment predictions that either end up earning them millions of dollars instantly or they lose everything and become homeless. The news keeps up this volatile appearance by every day saying how much up or down the markets went. If a steep gain or sell off happens they might bring in an investing “expert” to explain what happened. Again, for an individual investor, none of this should matter in the slightest.
There is one tool every investor has at their disposal which is practically guaranteed to earn them solid returns: time. Invest in the broad market and your money will grow, exponentially. You only have to give it time. Don’t concern yourself if the market drops 30% next week, it will come back. It actually takes some practice to detach yourself from your money. You shouldn’t be looking at how much you made or lost every day, it will drive you crazy. Once you learn to leave your money alone you are well on your way to becoming a successful investor.
There are a few other tricks you can use to earn even more money. Learning about how various investments are taxed can help you in specific scenarios. You should also take dividends into account. Reinvesting dividends into more shares can supercharge your portfolio.
Investing is complicated. But the first step is to understand you don’t need to know everything to be successful. A good ETF I know to buy shares in is IVV. It has a very low expense ratio and encompasses all of the S&P 500. But there are many similar ones out there that should work just as well. Whatever you choose the number one rule to follow is be patient.