Passive Investing: Everyone can be an investor today. You should as well.

Warren Buffet about Indexed-Exchange Traded Funds

IS INVESTING HARD?

Let’s be honest, investing can be tough. Not because it’s difficult, in fact it has never been easier, but because it requires a reasonable amount of time and self-discipline to become successful.

WHY SHOULD YOU INVEST?

One of the worst enemies of wealth preservation is inflation. Investing is one of the tools, probably the most powerful, to beat this intruder. It is essential if you don’t want to see the money you have saved in your bank losing its value at the rate of inflation, which for the US is expected to be at 2,8% for 2021. You can check the inflation rates so you can do the calculation for your case in particular.

This means that if you had $10.000 in your savings account, assuming your bank offers a 0,5% interest (if you're lucky), the value of your money by the end of the year would be $9.770:(10.000 x (1-(2,8%-0,5%)). That's right, you would have lost $230 of buying power in 12 months, close to $20 every month! That doesn't sound like a very efficient savings strategy.

ANYONE CAN (AND SHOULD) INVEST TODAY

If you had invested those same $6.000 in a basket of stocks from the S&P500 at the beginning of the new millennium and reinvested profits, considering the average annualised market return of this index has been 9,2%, you would have today close to $35.000. That’s a $29.000 profit (483%!) excluding inflation. Okay, so you invest some money, let it sit 20 years and come back to collect your profits? That’s right. But if you’re going to do it, why not fine-tune your strategy and increase the probabilities of being successful? We know by now that investing in the right companies and at the right time can boost your likelihood of success. So how do we accomplish this?

EXCHANGE TRADED FUNDS (ETFs): A profitable instrument for ‘laid-back’ investors

Investment Funds are collections of stocks, picked by a Fund Manager, who decides, according to his or her criteria, which individual companies will compose the fund. The money invested is accumulated from different individual investors.

LESS ACTIVE MANAGEMENT, LESS FEES: A SHARPENED SOLUTION

A modern and cheaper ‘version’ of Mutual Funds are Exchange Traded Funds, which appeared in the 1990s’ and gained popularity thereafter. One of the differences with standard Mutual Funds are that management fees are significantly lower (as low as 0,03% for the Vanguard S&P500 ETF today) but the main characteristic that made it explode and increase retail investor adoption is that it trades like a stock, meaning you can buy it and sell it anytime during market open-hours, whereas Mutual Funds normally charge penalties for early withdrawals (and some even for extraordinary contributions!). ETFs therefore are a more ‘liquid’ alternative for investors than Mutual Funds. These, together with other characteristics, make ETFs a great option for retail investors that want to benefit from investing in the stock market, spreading the risk (increased diversification), having immediate access to their invested cash and paying as low as 0,03% in fees!

Final Thoughts

Saving money is key to preserve wealth for the future, to buy a house, pay for your education or your children’s, start a business, save for retirement, etc. but investing it is even better. Inflation is a whimsical force that occurs in growing economies, but it can, and does, become mighty when manipulated. We leave today in an era of relative economic deceleration, ‘established’ industries being disrupted and central banks ‘printing’ fiat currency to fill the gaps that COVID-19 left in our economies due to a deceleration in productivity.

Discovering, developing and implementing the art of investing.

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