Investing is the means to build wealth and generate income by investing money in resources that are expected to generate financial benefits. Resources such as shares, bonds, real estate and cash. According to the world’s richest investor Warren Buffett, investing is for beginners in a nutshell; “investing now means giving up consumption to have the opportunity to consume more at a later date”.
So as an investor, you put money aside for later study, a trip around the world or a pension supplement, also you need to make sure that you choose the right online broker in Espana if you are in Europe. So the first question is whether you can put money aside now and whether you are willing to consume less now? At first we didn’t have that much money left, but it turned out to be quite easy to save a lot of money on car insurance, energy, phone calls, mortgages and groceries, among other things.
What is index investing?
John Bogle is the founder of index investing. In his thesis from 1951, he already claimed that investment funds could not claim superior returns compared to the market average. The principle of index investing is to buy a basket of tens or even hundreds of shares and keep them for years, eliminate advisory costs and minimize operational costs. Meanwhile, the market for index funds / ETFs has developed strongly and there are thousands of trackers or ETFs (exchange traded funds) that allow you to invest at low cost in an index such as the S&P 500, a basket of 500 of the largest U.S. companies such as Microsoft, Apple and Exxon Mobil. These ETFs or trackers are traded on stock exchanges such as Euronext Amsterdam and you can buy these shares via brokers such as DEGIRO or your own bank. For example, you have ETFs World, Europe and USA. According to Warren Buffett, index investing at ultra low costs is the investment innovation of recent decades and John Bogle deserves a statue.
Why should (almost) everyone have to buy index funds?
- Why index investing? Because most asset managers and investment funds fail to outperform the market (index). And we want the highest possible compound returns. So it is better to invest directly in an index at ultra low cost.
- From 1985 to 2015, the S&P 500 index had an annual return of 11.2%. The average equity investment fund return was 9.6%. That seems a small difference, but saves 946% return! ($94,600 difference on an investment of $10,000 in 1985).
Return investment funds versus index investments
According to Morningstar, an active investment fund charges an average of 1.1% in costs. The Vanguard S&P 500 ETF only charges 0.07%. Active investors must therefore perform significantly better than the market in order to ultimately achieve a higher return than the market. There is quite some research involved, but luckily a lot of online brokers in Italy have done the work for you.
- The S&P 500 is the leading US index and comparable to our Dutch AEX index. However, the AEX index consists of 25 listed companies, the S&P 500 of more than 500. In this way, you spread the risks more than with the AEX and historically, the highest returns are achieved in the US. More about that later.
- SPIVA keeps track of how investment funds perform in relation to the market. This is measured by baskets of shares (indices such as the S&P 500). It turns out that most professional investors do not succeed in outperforming the index in the long term. Over a period of 15 years, 2% to 16% of funds manage to outperform the index. In Europe, the picture is not much better.
Why look for the pin in the haystack when you can buy the entire haystack at low cost?
There are many ways to invest your money, but there are only three investment categories to choose from. It is important that you understand the characteristics of each category.
- Investments in interest-bearing assets
- Beginning ‘investors’ start saving money in a savings account. Investments in interest-bearing assets such as savings accounts, bank deposits, bonds and government bonds have a low, but relatively certain return.
- Investors receive interest and in some cases benefit from price gains. These investments are seen by the market as safe investments because the prices do not fluctuate very much and the chance of losing money is small. This makes savings accounts and bonds popular. Although the chance of losing money on savings accounts and bonds is small, it does not always mean that the purchasing power of your money is maintained.