The Solution
Being an enterprising investor demands a lot of time, even more when you are beginning. It requires an infinity of reading and once past the formation point, you have to research companies to decide where to allocate your money and how much. This involves going through businesses fillings, reading a company’s CEO, checking financials and comparing with other companies and many other things.
What can I do if I don’t have the time to do that?
The answer is “Becoming a Passive Investor.”
Before going into more detail, a quick dismantle of two false common beliefs:
If you are a passive investor you DO have to form yourself in finance in order to correctly select where to allocate your money.
Being a Passive Investor is NOT easy. It requires an immense amount of discipline. Benjamin Graham states that the passive investor has to virtually ´not care’ about market oscillations and has to basically ignore anything financially related that could temper the investor to act opposite to his style.
Investors between extremes are condemned to under performance.
"Over 80% of Fund Managers and 90% of Average Investors don't beat the market."
The main advantages of this style is that, once the work is done, if done correctly, that’s basically it. The other main advantage is that you won’t be an Average Investor. Your returns should be more in line with the market’s.
Selecting ETFs
An ETF is an exchange-traded fund which’s purpose is to represent or reflect the performance of a group of stocks based on country, region or industry. We are selecting ETFs to get exposure to a wide variety of assets in one or multiple categories. Some examples:
SPY: ETF that seeks to track the performance, before expenses, of the Standard & Poor’s 500 Index. The S&P 500 tracks the performance of 500 of the largest publicly listed companies in the US across a wide variety of sectors.
QQQ: This one is an ETF that tracks the performance of the Nasdaq-100 Index. The latter is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange.
DIA: DIA is the ETF that tracks the Dow Jones Industrial Average Index. This index tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.
These are the most common ones and the most representative of the US Stock Market. There are other ETFs that track stocks globally like the MSCI, or that tracks particular sectors; The XLF tracks financial companies, the XLE tracks energy companies, FINX tracks fintech companies.
It is upon the investor to investigate each composite’s holdings and decide what does he want exposure to. It is not an obligation to allocate in a single one ETF, it can be a mix of them.
It is very important to do the selection correctly since the investor ‘should’ keep going with the strategy for at least several years. The only way to not go crazy is by knowing what you own.
How to buy?
There’s no magic recipe on how to do the buying. Graham stated that the best way to do so if being a Passive Investor is by Dollar Cost Averaging (DCA), when done accordingly. DCA means that you’ll divide your money into small pieces and space the buys.
For example, you divide your money into 100 small pieces and buy every 1 week 1/100. The reason why this is powerful is because it automatizes a process that if done consciously could be against the investor’s own interest. At the same time, it allows you to ‘absorb’ in a more parsimonious way the volatility the market will have.