The Optimal Strategy?

Individual Stocks, ETFs, Mutual Funds, Bonds, Treasury's, Cash, Property... What on earth do you put money into, and how much? What proportion of your funds do you put into the various investment instruments? Although any particular strategy will not be best for everyone, there is one strategy that over time has proven to be successful. And it is also pretty good for managing the mental aspect of investing. In this article I will write about a strategy that will ensure you have good returns over time, and will prevent you from going mad watching the frequent wild swings in the financial markets.

If I have learnt anything having individual stocks, it is that watching the price swings they make can drive you nuts. I know the old Warren Buffett saying that the markets should be able to close for a decade and it should not worry you. But who isn't interested in looking at the price? There aren't many of us that can resist. The first I do every day is look at the price of my American stocks. It is really bad, but that is what I do. Today it was positive as my oil company PXD is close to getting brought by Exxon, causing the share price to rise 10%. But I have had other stocks over the past couple of months that have done terribly.

Three and a half years ago I decided to start investing in ETFs. The reason I did is because in the years since the Great Depression in 1929, the stock market has averaged 9.59% annual returns. This is 40% more than bonds, and 10% more than a balanced portfolio of stocks and bonds. The two ETFs I started investing into were not broad based index ETFs, which are generally the lowest cost. But the Asia-Pacific and the US Large Growth have still done pretty well. The main one's I hold now are the Total World Fund and the US 500. These are the lowest cost and that factor as well as there wide diversification are the reasons that they are my largest ETF holdings. As well as a few lump sum contributions I made in 2020 and 2021, I have made regular contributions each month. I have done the same thing with my Kiwisaver, as with most people in New Zealand. This is called dollar-cost-averaging, and is perhaps the best way to make investments. Lets say that you put all your savings into the US 500 at the start of 2008, just prior to the stock market crash that year, you would have had to wait until 2011 just to get back to breakeven. But say that you put in a little bit each month throughout the year, you would have been easily been in positive territory by 2011. This is because dollar-cost averaging balances out your timing risk.

There are two components to this strategy; the first is dollar-cost-averaging (putting in a little bit each week or month). and the second is having a cheap broker. Because you don't want to be charged a 1% fee every time you contribute funds. Those fees can really eat into your returns over the long term. Having a cheap broker like Hatch or Sharsies is essential for this strategy to work. Of course there will still be some volatility, like with individual stocks, but because buying an index ETF like SPY (the US 500) is a broadly diversified investment, the volatility won't be nearly as severe. A strategy like this, as long as you start early, will ensure a comfortable retirement for you and your family.