the best investment

The best investment you'll ever make, ironically, is also the simplest. As Warren Buffett has stated on multiple occasions: if you believe in the American economy, invest in the S&P 500 through one of the many low-cost ETFs (Exchange Traded Funds) available today (chiefly the SPY and the IVV). They can be bought and sold like any other stock, so no special steps are required to do so. It is so simple that few people take this idea as seriously as they should. As a consequence, I feel there are still too many people missing out on this opportunity. It's a well-known fact is that it's very, very hard to beat the returns of the S&P 500 in the long-run (more than a couple of years in a row). Only a handful of actively traded funds - closed to common mortals like me and you - have managed to do so. Most underporm, often by a wide margin, even before one considers the expenses (which, tend to be charged regardless of whether your portfolio has made a profit or not, and they tend to be well-hidden in the fine print).

Warren Buffett famously told his wife that when he's no longer around, she should invest  their money in precisely such an ETF. And, if it's good enough for Warren Buffett, (and easily accessible to each and every one of us) that's good enough for me. But I invite you to look at the statistics - e.g. at Morningstar - and reach your own conclusions. The case for investing into the S&P 500 is pretty straight forward, and I'm confident that, after doing your due diligence, you will agree with me.

This article can potentially help a lot of people to make an investment that is both profitable, diversified and much safer than picking individual stocks. It has the added advantage that you won't have to worry about it until you are close to retirement age. You can simply switch off the TV and financial news - as I've recommended elsewhere -and forget about it (until you are close to retirement age, or whatever your investment horizon). The ugly truth is that there is very, very little to recommend actively managed funds, and that it is incredibly hard to be a successful stock-picker (though our software will help in this regard). It takes a lot of time, experience and appetite for risk to do so - and that doesn't guarantee success. What is even harder is to actually beat the market year after year, in bull markets and bear markets alike. Almost nobody manages to do that.

Most people, when they reach a certain age, wish they had started investing sooner. Now that is a discussion for another time - and one that has no easy answers, but one of the factors that keeps people from investing is the overwhelming amount of data and stocks. In short, the complexity of doing so. By purchasing an ETF (which can be bought and sold like any other stock and is a fully liquid asset) you can do away with all the complexity. Consider it an added bonus that you won't miss a thing by switching off the TV, since corrections, like the one we're undergoing (while unprecedented) will be a mere blip in 20-30 years from now. I don't need to tell you that the sooner you invest, the better your chances of reaping the rewards.

Whatever your bank is offering: it's probably a scam by any other word. I could give you plenty of examples of outright scams, but let's assume your bank is honest (an oxymoron in my opinion) and has good fund managers. The chances that they'll beat the market over long stretches of time are still very remote, and almost certainly you'll pay a hefty amount in fees for the privilige of allocating your money with them. Indeed, the advent of ETFs has thrown traditional investment banking into disarray: more and more people realize that they're better off buying an ETF and, as a consequence, the industry struggles to justify - and sell - their product (though, unfortunately, a lot of uninformed investors are still swayed by the 'oh-so nice' advisor, who more often than not will be gone in 6 months). Such funds tend to be intransparent: right down to the annual statement which is 'made to look good' by any means necessary (for example by changing it's allocation at the end of the year). Put simply: there's very little - if anything - that speaks in favor of actively managed funds (unless you have enough money to afford the top 10 fund managers), and a lot that speaks for investing in ETFs instead. It should be mentioned that, while this article focuses on ETFs tracking the S&P 500 index, there are plenty of others - tracking specific sectors, markets, or strategies. However, the arguments for investing in a market tracking ETF do not apply to them as they are more akin to stock picking than the idea of a passively managed fund that gets you a piece of every major company - many of which are mutli-nationals, guaranteeing that you will have world-wide exposure anyway without having to specifically pick a market.

But let's forget about the people who have an interest in selling you actively managed funds for a moment. There is little disagreement that investing in the entire market (the S&P 500 being the most prominent, and hisorically profitable, example) is safer than investing in individual stocks - and much cheaper (the more often you trade the more your bank makes money) too. It sounds almost too good to be true - and all investments carry risk - but there is a solid, well-researched and - as far a finance goes - pretty uncontroversial case for putting your money into an index tracking the S&P 500. Personally, I'd recommend the IVV (it carries slightly lower expenses) - though you should consider all the alternatives as your objectives might tilt the best choice in one direction or the other. I believe in the American economy, and as such I like the idea of owning all the major 500 stocks just by buying a single ETF.

Ideally you would invest a certain amount every month. This has the advantage of averaging cost over time, essentially making it irrelevant when you invest. Whether the price is high or low, you just keep doing it and, over the years, you can be sure that you will have paid a fair price (though you have to do long enough). Of ourse, many of us can't do that for one reason or another (e.g. lack of a steady income) but that's no argument against putting your capital into such an exhange traded fund. A correction like the current one just might provide a great buying oppurtunity! (Though it must be noted that opinions on the current valuation of stocks differ and are a lot more controversial than investing in ETFs per se). To cite Warren Buffett again: we should rejoice when the market goes down: if your favorite store offered everything at a 25% discount you'd be happy, wouldn't you? The same frame of mind should be used when considering investments (at least if you want to be conservative about it). Watching prices minute by minute, day by day or even week by week, is an exercise in futility (unless you're engaging in short term speculation or studying how the market moves). Look at your investments once in a while, knowing that markets will go up in the long-term (by which I mean 20-30 years as mentioned before) at least until this super-cycle end (I'll write more about that, for now suffice to say that in this event we'll have bigger problems than our investments).

At this point I should mention another option that is similar, and yet different, from the SPY or IVV. While the former invest in each company according to its market cap - meaning that you will own a greater percentage of the companies with the highest market caps - there are alternatives such as the RSP which give equal weighting to every stock in the index (this investment style, in general, is also called indexing because it tracks an index). There isn't nearly as much research on equal weighted ETFs as there is on the 'classic' market-cap weighted ETFs, but evidence suggests that they tend to loose more in times of crisis (such as thie current panic) but recover more quickly as well. Over the course of 30 years, the RSP has outperformed the market-cap weighted fund such as the SPY and IVV (which is no guarantee that it will continue to do so in the future), wile lagging over shorter time frames. I'm just mentioning it to give you a more complete overview of your options from which to choos and you might want to further diversify your investment by allocating a portion of your capital to such an ETF. Again: due diligence is up to you. This is merely a suggestion and, at the end of the day, my personal opinion. At best, it is a suggestion - not investment advice!

As far as I'm concerned personally: combining convenience, diversification and returns that are almost impossible to beat (historically speaking) is everything I can wish for a retirement account. The fact that I've never lost a night of sleep - and never will - over it, just makes it more appealing and is definitely something that can't be said about picking individual stocks. Again, my motivation to start elfetica finance & engineering was (and still is) precisely to make stock picking more of a science and less of a gut-feeling, but that doesn't negate the usefulness of passive funds tracking the entire market (there are also ETFs tracking the Russell 2000, though it's a very different beast.)

I can't stress enough that, as with every investment, your mileage may vary, but it's hard to argue against the idea that this is one of the safest and most profitable long-term investments out there (based on historical data - I wish I knew precisely what the future holds). The simplicity of doing so is another thing to consider when weighing pros and cons (of which there aren't a great deal IMHO - though you might want to actively manage a portion of your capital if you feel confident about your stock-picking ability and have the tools to do so intelligently.) Not so long ago, owning every stock in the S&P 500 would have been time consuming and very expensive. Keep in mind that earning a little more, while taking on a lot more risk, isn't worth it - and that is assuming you'd actually end up earning more, which - as I can't repeat often enough - is something even seasoned professionals don't manage). For me the value of active investments is capitalizing on certain trends, but not something I'd stake my entire future on. Having the right software will give you an edge over other participants and help close the gap with professional managers, but it's still a lot more complicated, and risky, than buying the entire market and forgetting about it. (If you're wondering: investing in startups and the like, while also very risky, is a totally different game, and not comparable to investing in market quoted equities.)

You'll find many compound interest calculators onnline which will show you what your profit will be at the end of your investment horizon. You'd be surprised how much difference a couple of years - or a percentage point additional profit per year - will do to your account. For what it's worth: buying and selling the SPY or IVV might be profitable but, as far as long-term investments go, remember that timing the market is impossible (at least so far). Just forget the financial news and your investment and keep making regular investments (if you have the possibility of doing so). Unless you believe the end of the world is near, short-term corrections will work out themselves.

No article on investment would be complete without mentioning so-called 'black-swan events'. The current fear and loathing over COVID-19 (aka Corona virus) is such an event. These are things that no application, no broker and no investment advisor can predict (not accurately at least - though there's hope we'll be able to identify neuralgic time periods). They are events which recur more or less cyclically (but never exactly) and create major turmoil in the markets. I won't bore you with a list of the classic black swan events (the current crisis is enough to get the point across), but this crisis is a reminder that investment will never be 'safe' in the strict sense of the word (though scammers keep finding willing - and often sophisticated - investors for such ponzi schemes). Think of it this way: even if we could predict the events - say a viral outbreak - we'd have a hard time predicting how the market will react to them (though again, there's some hope on that front as well). What leaves people unfazed one day will throw everyone into panic the next. When you recognize such an event - and believe the reaction has been too harsh - consider if it might be buying opportunity (this COVID-19 certainly looks that way to me, though when and what, is something everyone will have to ponder for himself).

Benjamin Graham, and later his disciple Warren Buffett, have made the case for approaching investments the way you'd approach any other business deal: e.g. would you buy a local business at a given valuation (using whatever criteria you deem appropriate)? Now apply this reasoning to a stock (or ETF) and if the answer is no, it's probably not a good investment. Whether the market has further to fall, and whether stocks in general are cheap or not, are difficult questions to answer which are outside the scope of the current article. All I can personally say on the matter is that three years market gains have been wiped out by this pointless panic (though the recession it will lead to looks very real now). At least you can be certain that you won't be buying at the top of the market (though I'd wait until the situation stabilizes at least a little). That's a good place to start your analysis. A job which will become much easier once we start rolling out our software applications.

But, getting back to indexing the S&P 500: the bottom line is that it's not hard to see why this would make for a very attractive, and eceptionally safe (over 20-30 years), investment (as long as you believe in the US economy). Whether it's right for you is something only you can decide, but the principle is sound. The fact that almost no one ever beats the S&P 500 over longer periods of time makes it a no-brainer (at least for me). People just don't realize - or prefer to ignore - that consistently beating the market is incredibly hard, yes almost impossible to do consistently.

Just consider idea outlined above. It does not constitute investment advice (full disclosure: I do own a position in the S&P 500) and what's right for me might not be right for you. Do your own due diligence (always), consider your own circumstances and use your intelligence to decide if it is or not. All investments can lead to losses and, as a general rule, you should never blindly follow someone's advice or opinion, mine included! I strongly urge you to fact-check everything I've stated herein (and notify me if I'm wrong on something as I'm just human) or if you'd like to discuss this further just drop me an email. 

The fact that you can buy the entire S&P 500 like any other stock (the tickers are mentioned above) if quite exciting by itself. If you're planning to stay invested for the long-term - e.g. as a retirement account - it's pretty much a no-brainer as far as I'm concerned. Historically, the S&P 500 has returned around 10% a year but, at least in recent years it's been even better. Try to beat that consistently!

To paraphrase Benjamin Graham: be an intelligent investor!