Investing Is Simple

For almost everyone, the best approach to investing is to put your long-term savings into a single, low-cost, globally diversified stock fund (ETF or mutual fund) that’s only sold when retirement income is needed.

I think my university professors would have given me an A+ for that thesis statement. 

I wish I could end the post here but let me dissect the statement.

Long-term savings

Any lump sum of money that has a high probability of being needed within a short period of time should not be invested. Put it into a holding that generates interest with no volatility, so that when you need it you know it’s there. If you need it soon, don’t invest it. 

Single

The fewer decisions you have to make as an investor the better. 

Low-cost

Find something that doesn’t cost a lot. There are expensive, passively managed ETFs, and there are cheap, actively managed mutual funds. There are also expensive, actively managed mutual funds, and cheap passively managed ETFs. Costs are what matter. Keep them low. I wouldn’t pay more than 0.4%. 

Globally

Global means anywhere on the globe. In Canada, global funds are often weighted most heavily toward America, followed by Canada, followed by the rest of the world.

This lets you avoid the useless exercise of trying to figure out whether the American market is expensive, the Canadian/international market is cheap (or vice versa). 

Diversification means always hating something in your portfolio. 

Stock fund

Long-term money shouldn’t be allocated to anything other than stocks. But only if you know you can handle the volatility. Volatility is not risk, though. Volatility is the price you pay for the long-term returns we’ve seen in equity markets for the last 100+ years. 

(ETF or mutual fund)

ETF or mutual fund doesn’t matter. See above under “low cost”. A mutual fund isn’t a bad thing in isolation.

Only sold when income is retirement income is needed

This is the most important part of the sentence. The urge will come from fear or fear of missing out. Don’t do it. 

Sounds so simple, doesn’t it? Simple isn’t easy. But stick to this and you’ll do better than most.