One smart thing some of the smartest people do is let other smart people do the heavy lifting for them. Experts say the smartest people in finance do “one thing” that makes all the difference when it comes to investing.
Scott Galloway, a marketing professor, podcaster, author, and financial influencer recently took to Twitter and offered a piece of timeless advice for all investors.
“The smartest people in finance do one thing,” Galloway tweeted. “They buy a basket of stocks (ETFs, MFs) that’s low fees, and they don’t look at it again.”
What are ETFs, and why are they such a smart investment? What about mutual funds?
An exchange-traded fund (ETF) is an investment vehicle that is composed of a mix of assets, such as stocks and bonds, which is constructed to track the performance of a market segment or index,” according to Chase Bank.
ETFs are passively managed investment options, and they are actively traded throughout the trading day
A mutual fund is a financial vehicle that combines assets from shareholders to invest in a variety of securities like stocks, bonds, money market instruments, and other assets, according to Investopedia.
“Mutual funds are actively managed by an investment professional (i.e., a money manager),” Business Insider reports. Therefore, they don’t require you to be an expert. Mutual fund trades close at the end of the trading day.
Diversification is the logic behind both of these investment strategies. Essentially, you are buying a broad basket of investments to ensure that you’re not taking too big a bet on any one stock particular, CNBC reports.
By buying mutual funds and/or exchange-traded funds, you expose your portfolio to a wide swath of the market, simultaneously bettering your chances of success and narrowing your exposure to risk.
Historically, investors who hold large mixes of stocks and bonds have fared better, banking on the upward trajectory of broad US markets. Broad market indexes have earned an annual return of 9.6% from 1926 through 2019, according to calculations made by Vanguard.
Not only do investors gain an advantage through the pooling of resources, but they also save in the same way through low-fee mutual funds and ETFs.
For example, the going rate for many ETFs is charging an expense ratio of 0.03%. Let’s say you’ve invested $10,000 and held this investment fund for 40 years, when your investment in the fund is worth $215,000. The total fees you would have paid over four decades would be $832.
Compare that to a fund that charges an annual fee of 0.50%. Your $10,000 would be worth nearly $178,000. However, you would have paid $12,145 in fees over the 40 years.