With the advancement of financial technologies, it has become increasingly difficult for individual investors to beat the market consistently through active stock picking. Index ETFs that track market indexes provide a low-cost, diversified investment solution that has outperformed most active mutual funds over long term. This article summarizes the best practices and recommendations of ETF investments for individual investors.
Go for low-cost broad market ETFs instead of high-fee actively managed funds
As evidenced by Warren Buffett’s famous bet, low-cost S&P 500 index funds have soundly beaten hedge funds over the past decade, returning over 7% annually compared to around 2% for hedge funds. The ultra-low expense ratio of around 0.03-0.04% for S&P 500 ETFs like VOO and IVV also helps boost long term returns significantly compared to higher-fee actively managed funds.
Dollar-cost average into the market over longer time horizon
Market timing is extremely difficult even for professionals. A sound strategy is to dollar-cost average into the market over a longer period, say 3-5 years, to minimize timing risks. This approach allows investors to get better average costs for their ETF investments.
Go for ETFs over robo-advisors for transparent, low-cost access
While robo-advisors provide easy investment options, they typically charge an extra management fee on top of the underlying ETFs’ expense ratios. Investing directly into ETFs like VOO, IVV and VTI cuts out the middleman fees while providing all the diversification and factor exposures.
Stick to long term holding for compounding
Resist the urge to trade in and out of ETFs frequently. Long term holding allows compound returns to build over time. The S&P 500 has returned over 10% annualized over the past 90 years despite numerous crashes and corrections along the way. Having patience and perseverance is key.
In summary, low-cost broad market index ETFs like VOO, IVV and VTI are excellent investment options for most individual investors to gain low-cost, diversified exposure to the stock market over long term.