Vivid readers will have noticed in my recent portfolio updates and saving reports, that I am changing my investing strategy to global index funds.
Having had a hand in the latest SavingNinja thought experiment related to the lockdown, I wrote about how Covid-19 has produced an effect of realization on me. I mentioned that I wanted to change the trajectory of my onemillionjourney.com towards a KISS (keep it simple, stupid) perspective, but I did not give many details on how I would do it.
So, here’s a quick summary:
“Investing in global index funds or ETFs (preferably accumulators) following an automatic monthly contribution schedule, whilst I am drinking a beer, enjoying the near home sea wave stunning sound, and sitting on the terrace during a lovely sunny day.”
That’s basically the summer edition summary of my investing strategy for 2020.
Is that the end of the post then? Can the reader leave the site and go back to Twitter now?
Well, not yet. Hold on a sec, fast runner!
This strategy is easy to understand, that’s right. But unfortunately, the reasons why I am following it are not that simple.
So, stick with me (yup, grab a beer that’s fine), and we’ll go through the main reasons on why I am changing my investing strategy to global index funds.
Table of Contents
Time and simplicity
The older I become, the more it comes to my attention that time is my most valuable, non-renewable asset.
I must admit something: I’ve got a little gambler inside me, and that needs feeding! Whether I like it or not, that’s my reality, and the best thing I can do is to embrace it as it is. That needs some time.
But, once the little gambler is fulfilled with some P2P investments or dividend stocks (which will take 10-20% of my total portfolio as much), this question comes:
How much time do I want to spend on finding the new hot pick stock or timing the market?
0° 0′ 0″
Global funds will allow me to manage most of my portfolio in a simple and time efficient way. Setting up automatic investments will require no time from my side and rebalancing twice per year takes 30 minutes.
There are many other ways to spend meaningful time, as learning new skills, exercising, side hustling or simply just enjoying from being closer to my loved ones. These are far better investment opportunities to me.
Broad diversification
When it comes to investing, people tend to stick with whatever they know best, preferring to trust what’s most familiar. This is known as “home bias”. I have to say that I am not an exception and I have invested disproportionally in both of the countries I thought I had a better edge on, Spain and the UK. The result is a heavy disproportion on my alternative investments, having allocated more than I should have in platforms such as Property Partner and Housers.
I believe that being overexposed to any country is a mistake, and that also includes the US. A recent article written by Ray Dalio shows the Big Cycles Over The Last 500 Years and how empires have arisen and consequently fall.
Certainly, US investors have enjoyed from the highest stock market return over the last century, but will that last forever? Governments are taking unprecedented measures to combat Covid-19. Will that make China the new empire? Will US stocks continue outperforming the rest of the world stocks during the next 20-30 years that I am expecting to be fully invested in?
Honestly, I don’t know the answers, and if you do, bravo! I won’t stick my neck out for endorsing your beliefs though!
Low fees
Investing in global index funds or ETFs is one of the cheapest ways to gain from all the benefits of a well diversified portfolio.
The idea is to make as few as possible transactions to avoid being charged commissions, spread fees, currency exchange fees or any sort of stamp duty taxes.
In terms of costs, accumulators index funds are the cheaper option, as they reinvest dividends automatically, fact that helps to avoid being possibly changed for any of the above mentioned fees.
Accumulator ETFs are another smart option, but they tend to be more expensive to purchase, although the ongoing change (ODF) is generally cheaper.
As I am still in the accumulating phase, the ideal investment vehicle would be index funds, as I am growing my portfolio by buying assets in a monthly basis, following the paying myself first approach. That means I will at least have 12 transactions a year. These are a lot of transactions that can become costly, reason why index funds are more economical in the beginning.
As John C. Bogle puts it: “You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return”. It sounds crazy because it is. This is how much paying fees can erode our investments over the long haul.
We invest money to make money work for us, not to pay top executive brokers or Wall Street wolves their over-inflated wages.
Asymmetric risk/reward
The big picture of stocks is that they always go up. Over time the economy and the population grow, and working efficiency and productivity improves. This makes business more profitable, which drives the stock prices up.
Mankind tendency to improve productivity and growth is a natural instinct. We’ve come up with all sorts of theories, engineering masterpieces, ways to communicate, growing food, transportation, etc. All of it with the purpose of productivity growth and quality of life. That’s what humans have been doing for thousands of years, and it is quite unlikely we will stop doing so anytime time soon.
That’s why I and everyone believes that in the long term stocks will always go up, at least in a worldwide basis speaking.
Knowing this fact does not only give me a peace of mind but also an asymmetric risk/reward level on my investments, where the odds of having positives returns outweighs the risks of losing my money.
Furthermore, investing globally doesn’t necessarily mean investing in stocks only. There are several global index funds or ETFs for other asset classes such as bonds or property, that still allow us to diversify our asset allocation without losing international focus.
Silencing the enemy within
The single biggest threat and the major risk to our financial well-being is ourselves. Failing to become the master of our brains and psychology can ruin any financial independence road at any given time. Combine it with a ‘piece’ of one’s ego and you will be removing your train railings off the track, leading you to an unknown painful destination.
That’s not what we want.
From what I could read in this Jason Zweig’s article, neuroscientists have apparently found that the parts of the brain than process losses are the same parts that respond to mortal threads (amygdala). Good investment decisions come from our rational mind (cortex). Having the amygdala messing around with our decisions will generally lead to financial mistakes.
From now on, if you see mad people on Twitter allocating 80% of their money on Bitcoins you know why.
Investing in global funds for the long term is the simplest system and procedure to protect investors from ourselves. Overcomplicate it and you’ll be fighting against the worst enemy there is: yourself.
Conclusions
Investing in global index funds is a passive investing strategy that makes our money work for us while we spend our precious time on doing other things we want or like. Followers of this strategy understand their incapability to outperform the financial markets and accept the fact of not having an edge to do so.
Its diversified geographic exposure lowers the market and currency risks, but most importantly, it silences the highest risk there is — ourselves. Your emotional stability will thank you for taking this approach.
To top it up, this strategy allows investors to keep and asymmetric risk/reward portfolio in a cost-efficient way.
Sleep tight.
Now, with your permission, I am going to grab a beer.
Cheers!
