The historical perfomance of ETF’s

Exchange traded funds are probably my favorite way to invest. They take little effort, have great returns historically and are well diversified, what more could you ask for!

 

 

While there are many investors trying to beat the overall market, to become rich within a year, month or week. There are only few who manage to consistently beat the market. Let’s look at some historical figures:

 

S&P500.

S&P500 historical data. Source: MacroTrends.net.

 

Dow Jones.

Dow Jones Industrial historical data. Source: MacroTrends.net.

 

World Index.

The historical (total) returns of the MSCI World Index. Source: HorizonETF’s.

Long term, stocks go up, economies strenghten and you will gain wealth from simply following the benchmark. You will pay a very limited amount of money in fees for simply tracking a index and you’ll gain anywhere between 7-10% annually in the long term. This while requiring almost zero knowledge, zero effort and while being properly diversified. All you have to do is put your periodical order in with your brokerage to acquire a piece of one of those index trackers. Time and consistancy are the most important factors in such an investment.

 

Active fund managers vs. passive index trackers.

So I made my case for index trackers, but there are so many funds as well, here are some key differences between funds and ETF’s:

  • -Fees.

Fund managers are trying to beat the market and they perform a whole lot of research to achieve it. Doing research is work and they make sure you will pay for their hours. Funds are generally way more expensive than market tracking ETF’s.

  • Performance.

While an index tracker ‘tracks the index’ and copies the market returns, fund managers want more. Sadly about 9 out of 10 managers fail to beat or even match the market.

 

Back me up here mr. Buffett!

The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.

Billionairs Mark Cuban and Tony Robbins were quick to agree with this statement saying:

If you don’t know too much about markets, the best way to invest your money right now is to put it in a cheap S&P 500 fund.

And:

When you own an index fund, you’re also protected against all the downright dumb, mildly misguided or merely unlucky decisions that active fund managers are liable to make.

 

The biggest downside for some people might be that investing a monthly sum into ETF’s is that it ‘could be boring’. Some people see investing as a hobby and want some excitement. If this is the case I’d still recommend splitting the strategies. Why not put a part of your money in an account that passively, without any worrying, will return you great gains for years, while you put the other part of your money in more speculative investments.

 

With the DutchIndependence portfolio I work as follows:
-78% goes into all kinds of ETF’s.
-10% goes into defensive dividend stocks on which I sell options.
-12% goes towards technology/e-commerce stocks.

I’d say my portfolio is quite defensive, at least 70% of all my money goes into ETF’s and stocks I consider defensive. I prop up my returns with dividends and option premiums and long term I hope to have a solid return with my technology/e-commerce companies.

The first thing I do after every pay check is transferring a part of the money into my ETF account at my brokerage, that’s pretty much all I have to do to grow my wealth month and month again.

I hope these insights might convince you to passively build your wealth, or at least to make you curious about ETF’s and how they could take you to your financial independence!

Happy investing!

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