-Continued from Part 1…
Apart from the vast array of savings and deposits offered, one of the best and most impactful long-term investments you can make is in the equities market. A well-diversified portfolio (in terms of both geographies and industries) can do wonders for you over the long-term. Warren Buffet, and a number of long-term studies point to long-term annual returns of 7% on the US markets alone. Given the growth in emerging markets, a smart investor could potentially make more.
But all of this centers on the assumption that you have the courage to ride out the dips, and not make stupid investment decisions based on emotions. Most normal investors panic when they see their portfolio down 10-15%. In their pain stricken state of mind, they decide to sell, take the loss and “salvage” whatever they have left. But this is the worst thing you can do for your portfolio. In fact, with stock prices so low, this may be the best time to invest further and buy more. An easy way to remember this is to memorize the famous investment adage: Buy low, Sell high. Not the other way around!
If you’re not sure about investing in individual stocks or bonds, you might consider mutual funds, or ETFs. As with most things in life, it’s always best to stick with ETFs from well-known or firmly establish brands to avoid other kinds of risks. I personally like ETFs because they:
- Are relatively cheaper: Mutual funds typically come with all types of fees: management fees, administrative fees, ongoing fees, loads, etc. Depending on the type of mutual fund, these fees can even cross 3% and some even reach 10%. ETFs on the other hand tend to have lower expense ratios. Higher fees reduce returns. Just to give you an idea of the numbers, a 1% fee, compared to a 0.25% fee on a US$ 10,000 portfolio over 20 years reduces returns by US$ 30,000! How ‘bout them apples?
- Trade like stocks: The price of mutual funds is typically determined at the end of the day. However, ETFs trade like stocks, and the price is always current. Also, since they trade like stocks they tend to have much higher liquidity, meaning they might be easier to sell when you want to.
- Offer diversification: Buying a single region/country or sector focused ETF can give you exposure to a range of companies, thus protecting you from the risk of investing in any single company. Thousands of ETFs available offer a multitude of diversification options.
- Offer tax benefits-This may or may not apply depending on your situation.
On a personal note, I think there is a lot of money to be made from event based investing and strategies like it. But let’s leave that for another time.
All said and done, everyone needs to decide for themselves the amount of risk they are willing to take based on their personal situation. The only thing that stands true today, as it did 100 years ago is the little line that reads: past performance is not indicative of future results.