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Afraid of investing in stocks because it is too complicated?
That is what I feel too when I get started.
But after investing for 4.5 years, I found a simple way to invest in stocks.
It is by investing in ETFs.
In this week’s newsletter, let us talk about why I invest in ETF (Exchange Traded Fund) and how to invest in one.
Disclaimer:
Any specific investment mentioned below is for educational purposes, not investment advice. Please always do your due diligence before investing in any asset.
What is ETF
Source: Pexel
If we see stocks as fruits, ETF is like a basket of various fruits. Similar to stocks, we can buy ETFs in the stock market via a brokerage account or robo-advisor.
There are many types of ETFs available in the market (as shown in the image below)
Source: Visual Capitalist
Among these ETF types, there is only one type of ETF that I invest in, which is the index ETF (especially the US S&P 500 ETF)
Related Article: Everything You Need to Know About S&P 500
Why I Invest in Index ETF
- Diversification
Do you remember I mentioned ETF is like a basket of various fruits?
When we invest in an ETF, we also invest in hundreds or thousands of stocks. It helps us diversify our money indirectly when we buy an ETF.
- Low cost
Index ETFs usually have expense ratios as low as 0.03% due to their nature of being passively managed. This fee is significantly low if we compare it with the annual management fee for unit trusts or mutual funds.
You will see from 1% to 3% in annual management fees from unit trust/mutual funds. Over the long term, it will become a huge fee to pay for investors.
- Less effort
As index ETFs are diversified, we only need to focus on 1 or 2 ETFs.
That’s why investing in index ETFs is often called passive investing as we only need to buy and hold the ETF. No allocation adjustment is needed for multiple stocks.
How ETF simplify our stock investment
Let’s say a stock investor chooses to invest in individual stocks. To have a diversified stock portfolio, the stock investor has to
- Buy 10 to 20 stocks to diversify his investment (higher brokerage fees)
- Adjust the allocation for each stock in his portfolio
- Do research on each company that he planned to invest in
From the above points, you can definitely see the effort needed to manage a stock portfolio and also there are significant fees incurred during the process.
But if we just invest in ETFs, we can skip the process mentioned above. We only need to choose 1 or 2 ETFs, keep buying them, and hold them for decades.
Some may argue that investing in individual stocks may have higher returns. I won’t deny that.
But for me, I rather save my time and energy, and yet still get decent returns from my stock investment.
Should We Consider Malaysian Index ETF
Did you realize I only talk about the US index ETF but did not mention anything about our Malaysian ETF?
Let me share with you the performance of the KLCI index (Bursa Malaysia Top 30 Stocks) over the past 10 years.
Source: Trading Economics
Not that I want to look down upon the Malaysia stock market, but that graph shows us the fact. It won’t be exaggerating to say that you can get better returns from fixed deposits than investing in our local index ETF.
That’s why you see most stock investors who invest in Bursa Malaysia only invest in individual stocks and REITs, rather than buying the local ETFs.
Which ETF Should We Invest
In his annual reports, Warren Buffett always recommends S&P 500 ETF for most investors.
Well, that’s what I am investing now. I have around 90% of my investments in Vanguard’s S&P 500 ETF. Its stock symbol is VOO.
Another good US ETF that I am invested in is HLAL. It is an ETF that includes top US companies that comply with Shariah standards.
A good choice for Muslims to invest in the US market.
Here’s a simple table that shows their differences:
As a non-Muslim, I choose VOO to have a well-diversified investment and lower expense ratio, but I am also investing a small portion in HLAL.
If you want to invest in HLAL, Wahed Invest is a great tool to invest in it.
Related Article: What is Robo-advisor and Which One Suits You
In Summary
Ever since I learned about ETFs, it opened my eyes to the possibility that we can invest in stocks in a simple and passive way.
By investing in ETF, I no longer need to:
- Screen through every stock in the market to find good stocks
- Read the financial statements of each company
- Follow the trends and stock news frequently
Passive investing is the investing style that I’ll stick to for decades because I like to keep my finances simple.
If you think the same, then I hope the article will be super helpful to you.
That’s all for this week, my friend!
Talk with you again next week.
Your Money Buddy,
Marcus
If you’re interested to know what financial tools I use, here are one of them that I use most of the time:
→ Versa – Where I invest my emergency fund for up to 4.0% return. Get free RM10 if you register a new account with my referral code “AL9JZJ9H”