The evidence is unequivocal: Most of us are horrible investors.
Emotions cause us to buy when stocks are high and sell when they're low. We trade in and out of stocks even though transaction costs diminish our returns. And we rarely hold onto anything for long enough to allow the law of compounding returns to take effect.
The author Carl Richards refers to this as the behavior gap. "Typically, the studies find that the returns investors have earned over time are much lower than the returns of the average investment," Richards says in his book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.
What should you do about this? I encourage you to completely rethink the way you're investing. Instead of buying individual stocks, go with exchange-traded funds. And instead of trying to time the market, adopt a simple strategy of dollar-cost averaging, whereby you invest the exact same amount each month, quarter, or year.
Your objective should be to buy things now, and let the power of time and compounding returns do the rest.
With this in mind, I thought it'd be helpful to share a list of five exchange-traded funds that can and should serve as the backbone of any prudent investor's equity portfolio.
|
Fund |
Assets Under Management |
Expense Ratio |
Dividend Yield |
|---|---|---|---|
|
SPDR S&P 500 (SPY 0.33%) |
$162 billion |
0.09% |
1.93% |
|
iShares Core S&P 500 (IVV 0.33%) |
$47 billion |
0.07% |
1.88% |
|
Vanguard Total Stock Market ETF (VTI 0.46%) |
$38 billion |
0.05% |
1.89% |
|
Vanguard Dividend Appreciation ETF (VIG 0.74%) |
$19 billion |
0.10% |
2.05% |
|
SPDR S&P Dividend ETF (SDY 0.48%) |
$12 billion |
0.35% |
2.43% |
Sources: Yahoo! Finance, ETF Database.
My criterion was simple. The funds had to represent the broader market. They had to have low expense ratios -- meaning that management fees or other administrative or transaction charges wouldn't eat too significantly into returns. And they had to pay a dividend, which could then be automatically reinvested to boost the compounding process.
As you can see, this isn't rocket science. These are all well-known funds that are exceedingly popular with professional and individual investors alike.
If you want to be an exceptional investor, then buy these funds, hold them for years (ideally decades), and let them do their thing. You'll thank yourself when it's time to retire.
