I decided to call this method market investing, although you won’t hear it called by that name by anyone else. What I am referring to will likely be called index investing, or broad market ETF investing, or index mutual fund investing. There maybe subtle differences between these terms depending on who you hear them from but the underlying concept is the same though.
I do not have enough money to buy a share of all the stocks, much less multiple shares of each. I can safely guess that you don’t either (sorry if you are reading this Mr. Buffett). Whenever people talk about the stock market they usually say “the NASDAQ is down 3% today or “the TSX went up 200 points over the past week”. The meaning of this to you is not much if you just have the few stocks that you have managed to buy. The S&P 500 can be flying high while your shares of Scotia Bank are down 5%. It takes someone a lot smarter than you or I to beat the stock market every year (sorry again Mr. Buffett).
Many mutual funds will have you believing that they can beat the market every year. They may even have a graph showing that they did for the last five years. But the longer the time frame the more likely that you are to see that they can’t beat the markets. So you are left with the choice of trying to pick your own stocks to beat the market. But you have a lot of things to do and you can’t study charts and news as much as the mutual fund managers we just decided couldn’t beat the market. So bonds? Not unless you are happy with very mediocre returns, possible losing money over the long term after you consider inflation.
Here is where the key comes in; if you can’t beat ‘em, join ‘em. You can invest in a fund such as VUS which will follow the returns of all the stocks in the United States with the microscopic MER of 0.15%. So your investment results will be identical to the Us market except for the 0.15% you pay in fees. Or to invest in the Canadian stock market you can buy XIC and pay a MER of 0.27%.
Over the course of time the stock market has increased in value. Maybe not in year 1, or even by year 3. But if you wait long enough and have invested in either of the ETFs I mentioned above your investments will go up.
Now in the interest of full disclosure, I do not own either of these funds. This I consider a mistake however. I knew about market investing and had heard from lots of smart sources that it was the best way I could invest my money for a long period of time. I ignored this and bought I an ETF with very little price changes but a solid steady dividend. I also picked up a stock which I think will go up in value a lot and will pay and increase their dividend.
My next purchase is going to be VUS or XIC. I want the prices to go down a bit as both are closer to their 52 week high than their 52 week low. VUS is at it’s high. By waiting for the price to go down I realize I am implying I am trying to time the markets, which is pretty near impossible. But I do not have much capital to invest and simply want to maximize what I have.
So if you are looking for your investments to grow, you should probably just let capitalism do the work for you. Buy an index ETF and forget about it until you have the money to buy more of it. You can buy different funds to mirror different markets, for example THD will folow the Thailand stock market. In the end the market is likely to be the best advisor you can have and it also has the lowest price with very low MERs for all sorts of index funds.