So the nice thing about being a staff writer for a great site like Young and Thrifty is that when you produce a neat little project, the powers that be allow you to get exposure (or as the kids say these days, “pimp it”) on their site. I really appreciate the review that Y and T did for the book, and I am grateful for the chance to go explain my feelings on ETF investing a little more.
[Editor’s Note: You’re welcome! Thank you for being a staff writer. Don’t know where this blog would have been without your help!!]
For Wall Street To Get Rich, Someone Must Lose
In short, the main reason you should invest in ETFs is because the vast majority of people that believe they can beat the market, simply don’t. Let me explain who you are competing with when you try to pick stocks in the stock market. The guys that run billions of dollars’ worth of hedge funds, they have entire teams of geniuses that have went to noted financial schools for years, then spent years more building a career that meant spending 70-80 hours a week behind a desk looking at financial statements. On top of that, they literally pay government insiders for semi-confidential information, in addition to the information networks they have that provide them with valuable info that is not available to most people. As if those advantages were not enough, most “hedgies” or large investment firms such as Goldman Sachs also have former NASA mathematicians or someone similar to do their statistical analysis. When you combine math geniuses with supercomputers that can carry out investing algorithms (see: high frequency trading and quants) you get a money making machine. So, if you are smart enough to beat that set up, why are you reading this blog and why are you only worried about investing your own money?
The bottom line is that the stock market is heavily slanted. The big boys like Goldman Sachs give maximum donations to both political parties in the USA every year, I highly doubt that this will change. This is on top of the fact that we as humans are genetically predisposed to being terrible market-timers (see my eBook for proof). The sad thing is that many people have realized that the stock market is slanted and have come to the false conclusion that they should just stay out of it entirely. The fact still remains that equities will always give the highest overall return on investment of any asset class; therefore, if you bypass investing in the stock market entirely, you are missing out on mega growth of your nest egg. This is why ETFs are so great for the average investor. You don’t have to compete with the math geniuses or business gurus, you don’t even have to worry about which fund manager might have the best insider trading information. All you have to worry about is setting your asset allocation (we cover this in the book) and you are set to go.
Maybe I Am The Chosen One?
In order to back up my theories, my favourite study in the book is an extensive Dalbar study that was done from 1990-2010. The study concluded that while the S&P 500 returned 9.1% on average over those years (a little under the historical average, but still pretty good) the average American investor only returned 3.8%! The main reasons being that their built-in human instincts were terrible for allocating capital (investing) and the fees and commissions killed their returns over time. It just doesn’t make sense to me to believe that you can beat the market over the long-term unless you are a really smart person, making very focused bets. Go ahead and see how many successful money managers have looked like geniuses for a little while, and then crashed and burned once their portfolio got too big. I will grant mutual fund devotees that there are funds and managers out there that can beat the market, but I am skeptical as to if they can be found consistently, and how many of these types the average investor even has access to. ETFs just make so much more sense on a consistent basis. If the investors in the aforementioned study had merely purchased the Vanguard ETF VOO over and over again, they would have increased their average returns almost 2.5 times (just check out what that does when compounded yearly).
If you aren’t yet convinced that ETFs are probably for you, then check out my eBook. I included the table of contents below for a sneak peak. I’m looking forward to reading your comments and/or suggestions!
Chapter 1: How Can I Make You $248,484.92, While You Chill On Your Couch
Chapter 2: My Story
Chapter 3: What the Heck is an ETF?
Chapter 4: Why Most People Can’t Beat The Average and Why You Shouldn’t Try
Chapter 5: Why ETFs Kick Mutual Funds’ Butt!
Chapter 6: What ETFs Belong In My (or your) Portfolio
Chapter 7: Exotic ETFs
Chapter 8: Potential Drawbacks of ETF Investing and How To Minimize Them
Chapter 9: Getting Started With ETFs In 99 Minutes or Less
Interested for more? Click here to download the free ebook!