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ETF Investing | Ultimate Guide for Beginners

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This full ETF Investing Guide will teach you everything you need to know on ETF Investing.

ETF investing

ETFs are by far the best and safest way to invest in the stock market, so here’s a complete ETF Investing Guide for you.

What is ETF Investing?

As you know, when you invest in the stock market you can invest in single stocks, which are basically pieces of ownership of a company.

If you buy for example a stock of Apple for $170, you become a shareholder of a little share of Apple.

The problem with this is that there are literally thousands and thousands of companies. So if you’re not as smart as Warren Buffett, you’re not going to be able to study long, tedious financial statements to understand which company is the best to buy. 

So ETFs solve this problem for you.

When you buy an ETF, you’re buying a package that contains several companies, usually hundreds or even thousands. Still, the etf is not going to be more expensive than buying single stocks. You just get a smaller piece of many companies.

There are ETFs for basically everything. For different sectors, different countries. For example you can buy an ETF that contains all big companies in the technology sector. Or an ETF of all companies of the United States. Or even an ETF for crypto, or for Real Estate.

ETFs vs Index Funds

You might have heard of Index Funds.

Index Funds and ETFs are almost the same thing, so whatever I say here about ETFs is valid also for Index Funds. To keep it easy, the most important difference is that you can buy ETFs anytime during the day like stocks, while Index Funds can be bought only once a day at the price they reach when the market closes.

If you’re starting with little money, ETFs may be a better option, as they have lower minimum investment thresholds, and many brokers don’t charge a trading commission.

Advantages of ETFs

Why would you want to buy ETFs or index funds instead of single stocks?

Diversification

There are many advantages and the first one is Diversification: If you were to invest in single stocks you’d have two choices: either you are really passionate and also as competent as Warren Buffett, that you can read long financial statements and understand if a company will go well in the future, or you are gambling, because you don’t know exactly what’s going to happen to the company.

I know everybody wants to believe he’s able to pick the right stocks, but the truth is that none of us really has the tools and experience like Buffett or other great investors.

So here come ETFs to the rescue, because you don’t have to bet on a company, you’re investing in a whole pack of hundreds of companies and if some of them drop in value, others will increase in value and the overall performance of the ETF will tendentially be positive in the long term.

Before 2000 all tech companies in the world saw a huge increase, which ended with a huge crash in 2000 called the dotcom bubble burst:

All tech companies dropped up to 80-90% in value. If you bought for example the company Intel in the year 2000, which is still a pretty famous company, thinking it would have made you money in the future, right now after 20 years you’d still have less than half than the money you invested.

By buying the whole technology sector instead, through an ETF or an index fund, from 2004 to today you’d have made 8 times your investment:

Active vs Passive

Another advantage is that the companies inside are selected automatically, following famous market indexes. This is called passive investing.

On the other hand, let’s say you give your money to an active manager or invest in a so-called actively managed fund. In this case, the companies within the fund are going to be chosen and traded by an active fund manager that’s going to pick individual stocks in the hope of outperforming the market. This might sound clever, but has proven to have terrible historical results compared to passive investing.

According to the research from S&P Global, active mutual fund managers, both in the United States and abroad, consistently underperform their benchmark index. For instance, over the 20-year period ending with 2023, 97.4% of all professionally managed portfolios in the U.S. underperformed their benchmarks.

This is by the way the key distinction between index funds and mutual funds. Index Funds, like ETFs, are usually passively managed, mutual funds are usually actively managed. 

Myths to debunk

I want to reassure you of two fears people usually have when they start investing.

The first fear was also my fear before I started investing, and that was:

“what if I lose all my money”.

As opposed to investing in single stocks, or investing in other assets like crypto, when you invest in broad based ETFs and index funds you are investing in whole markets, sectors and countries like the U.S..

So the probability of losing your money is basically the same as if the whole country went bankrupt. Pretty low.

This chart shows the average returns you’d have, per year, for 20 years, depending on when you start investing:

No matter when you started investing, since the beginning of the stock market in 1919, you’d have always had a positive average annual return by keeping your money invested for 20 years, and this return is represented by the blue bars.

The second fear is:

“what if I make the wrong choices”.

Investing in ETFs instead of single stocks or other assets is going to reduce so much the number of choices you have to make, because it’s super easy and super well diversified, that you really can’t make anything wrong if you follow some simple rules.

So, if investing in ETFs or Index Funds is really so easy and everybody can win, why do people still buy individual stocks? Well, for the same reason why people like buying lottery tickets or playing at the casino: in the hope of above average results. But statistically, you’re going to achieve a better long-term return with ETFs and index funds than with single stocks.

Best brokerage accounts

Now let’s move first to how to actually start investing and opening a brokerage account.

The process of investing is literally just going to be moving some money from your checking account to an investment account and buying an ETF or a stock with a couple of clicks. It’s actually pretty easy.

These are some of the most common brokerages, or investments accounts, that you can open, no matter what country you’re from:

For the U.S. the most common investment brokerages are Schwab, Fidelity or Vanguard, but most young people use Apps like Webull or Robinhood which are also completely fine.

If you come from or UK you can use Trading 212 and from Europe also Trade Republic, and if you use this link, you’re going to get a free stock with a value of up to $100 by signing up.

Depending on your country, with these brokers you’re going to be able to open a normal investing account or also tax advantaged accounts. For example if you live in the US, you should absolutely profit from a Roth IRA, which is an investing account that makes your investments grow tax free and you can withdraw them tax free if you wait until you are 59 years and a half of age. The only limitation is the amount you can invest every year which is $7,000 if you’re younger than 50, otherwise $8,000.

Another interesting account in the U.S. is the 401(k), which is a workplace retirement plan that lets you invest annual contributions up to a certain limit and the employer also matches your contribution up to 100%. 

In the other countries you may find similar conditions, for example an equivalent of the Roth IRA in the UK is the ISA, in Canada TFSA, Super in Australia.

Now Let me guide you through opening an account with Vanguard, through the website, and Webull, through the app.

Opening a Vanguard account (Website) 

On Vanguard’s Personal Investor homepage, you need to select “Open an account”:

Assuming you’re going to be using your bank to make your initial investment, you’d select the first choice:

After clicking sign up on the “I’m new to Vanguard” option, you’re shown an overview of the next steps and the whole process of opening an account will take you 5 to 10 minutes.

Then you need to select the type of account you want. The first is the IRA, like a traditional IRA or a Roth IRA, and the second is a normal investing account.

You’re going to be asked for the typical information like address, phone and so on. Remember that investment accounts are like banks, so they need to ask you this information just like a bank would.

Some questions might seem inappropriate to you, like info about your employment, income and net worth, but they have to do it just because it’s required by law.

Once your account has been accepted within 3 to 7 days and your money reaches your new account, you can start investing and you’re going to be able to buy etfs, index funds, and even stocks.

Opening a Webull account 

Vanguard does also have an App, but to show you how to set up a brokerage from your phone I’m going to use Webull. By the way, the process of creating an account and buying ETFs is the same for all brokers, so if you know how to do it with one you’re going to manage with any broker.

Step 1 is download and open the Webull app on your phone. Click on Open Account located at the bottom of the screen and then you’ll have to identify using an ID.

Step 2 is filling in your personal information as they appear on your ID, and then your employment information, just like we’ve seen from Vanguard. You then answer some questions about your investment objectives, your finances and you confirm.

The next step is to choose your account type. Choose “Cash Account”, because right now you don’t want to deal with margins, and choose stocks and ETFs as securities. Webull usually requires 24h to review your application and then you’re going to be ready to go.

Discover the best ETFs 

Let’s talk about how you can actually find the best etfs to invest in.

This here is a website called Vettafi. It’s a great database of all existing ETFs and you can use it to filter the best ones per asset class, fees, returns, holdings and many other factors.

So, what are the most important parameters of an ETF?

The first is the Total Assets, or Assets under Management, which is the amount of money that is managed within this ETF. Generally speaking, the higher the value the more trusted the ETF is. So by sorting per Total Assets you can be sure that the first ETFs are the most famous in the world and are all wonderful choices.

Notice that the first 3 are all called S&P500… So what is that?

The S&P500 is a list of the 500 best performing public companies in the U.S.A., like Apple, Microsoft, Amazon, Google, Tesla, and embraces all sectors of the economy so it’s wonderfully diversified.

It can be bought as an ETF from different brokerages but you don’t need to have an account with that brokerage to buy it. For example the S&P500 ETF from Vanguard, which is called VOO, can be bought even using apps like Webull.

The S&P500 is such a good combination of companies that even Warren Buffett recommends it to the majority of investors because it’s simple and complete. The S&P 500 Index (SPX) grew from inception in 1928 through the end of 2022 with an average of 9.82% per year. So we have a long term history, almost 100 years, with a gain of almost 10% per year. 

Another important parameter of the ETFs that you need to consider is the so-called Expense Ratio, that you’re going to find on the ETF database by clicking on expenses.

The expense ratio represents the percentage of your portfolio value that you’re going to pay every year as fee.

The Vanguard S&P500 ETF VOO has one of the lowest Expense Ratios on the market with 0.03%. Obviously, the expense ratio must be as low as possible and usually, when you buy really famous ETFs with a high number of total assets, it is going to be extremely low.

There are other factors you should look at, like the number of holdings, performance and dividend yield, but for a detailed explanation of how to actually choose the best ETFs and how to easily set up a free ETF screener you should watch this video.

The 5 Best ETFs

Let me give you 5 of the best ETFs around.

The first one is VOO, which I mentioned earlier. VOO is the S&P500 ETF from Vanguard and contains 500 of the best performing companies in the U.S. Stock Market. Good news is you can buy most American ETFs even from the rest of the world, only the ticker is going to be different. So for example if you want to buy this ETF from Europe, you’re going to find it as VUAA. The easiest way, though, is to search the whole name in your brokerage account. So for example write Vanguard S&P500 instead of VOO and you’re going to find it from almost anywhere in the world.

Another great ETF is VTI, which is the Vanguard Total Stock Market ETF. This ETF includes not just the best 500 companies, but all the companies in the U.S. stock market. We’re talking about over 4000 companies so literally for this ETF to perform bad in the long term you need to have the U.S. go bankrupt permanently.

Great ETF which not only contains stable, safe companies, but also pay really good dividends every year, are VIG, VYM and SCHD. If you don’t know what they are, dividends are money you’re going to receive directly on your account, usually every three months, just by owning the ETF:

While Dividend ETFs tend to include value companies that pay dividends, if you are interested in companies that focus on strong growth and therefore are going to appreciate more in value but without giving you dividends, QQQ is one of your best choices. QQQ is the Invesco QQQ Trust Series I and contains the best 100 growth companies included in the Nasdaq Index.

To expand over the U.S. market you have basically 2 options: If you are from the U.S. I would suggest something like VEA, the Vanguard FTSE Developed Markets ETF, which offers exposure to developed markets outside of North America, including Western Europe, Japan, and Australia. If you are not from the U.S., instead you could go for a World ETF, that automatically includes all developed countries including the U.S.. In general, the markets outside the U.S. don’t perform as well as the U.S. so this number 5 is not necessarily one of the best 5 ETFs in existence, but it’s definitely the best choice for diversifying.

Fractional Shares

Now, when you look for an ETF or a Stock to buy in your investment account, you’re going to find the unit price, the price of a single unit. For example the S&P500 ETF from Vanguard is trading at around $470 (at the time of writing). But this price has absolutely no meaning to you, because since a couple of years we have the option to buy so-called fractional shares. So instead of buying a whole unit for $400, you can buy a small portion of it for like $1.

This is the major reason why you shouldn’t care about the unit price of an ETF, but it’s not the only one.

Another reason is that the unit price doesn’t give you any information about the value of an ETF or Stock. It’s not like the price tag of some shoes. And the reason is that when a company goes public and gets valued a certain net worth, they decide in how many shares they want to divide this value.

So let’s say that a new company goes public and gets valued at $1 Billion. They can create a billion shares, each valued $1, or they could create 2 shares, each valued half a billion. So the value of a single share doesn’t tell you anything about the value of a company. It was relevant in the past because you were forced to pay at least that amount because you couldn’t buy fractions of a share, but not anymore.

Analyzing ETFs

Let’s say now that you pick an ETF and you want to understand something more about it. For whatever ETF, when you google it, you’re going to find its official page that shows you everything you need to know.

Let’s take for example the S&P500 from Vanguard, VOO. First important information, what kind of index it is:

It’s domestic, so focused on the U.S..

It’s large blend, so it includes large companies which are partially value and partially growth companies.

It has a dividend yield of 1.48%, meaning it gives you every year 1.48% of the value you possess back as dividends.

It has a 0.03% expense ratio, meaning every year you pay 0.03% of the value you possess in fees.

Scrolling down to performance, you see that since inception in 2010 it has given an average annual return of around 13.7%, 12.8% in the past 10 years, 11% in the past 5 and so on:

Really solid numbers as you can see.

Scrolling more down you get to a really interesting part that shows you how the sectors are covered inside the ETF. As you can see you have a high percentage in Information Technology, which is the strongest growing sector, while others like Utilities and Material have barely 2-3%.

After that you can see the list of the companies included in the ETF. The S&P500 is going to include all famous companies that you know, like Apple, Microsoft, Amazon, Tesla, Facebook and so on. If you look for other ETF from other investing companies, the page layout might be a little different but this is usually the data you find.

Dividends and DRIP

A really important concept is Dividends.

Dividends are an amount of money that the company pays to the shareholders, usually every 3 months. If you own ETFs you are a shareholder in hundreds of companies, so you’re usually going to receive dividends.

To explain it simply, you have two kinds of companies: companies that give back their earnings to the shareholders as dividends, and companies that instead invest their earnings back into the growth of the business.

Of course the world is not black and white so companies can do both. Usually we can say, though, that growth companies, like Apple, Meta and Tesla tend to pay as little dividend as possible because they want to grow faster. Other mature companies with little growing margin like Coca Cola tend to pay good and stable dividends every year instead.

The choice if you want to focus more on growth or value is yours, but what I can suggest to you is that if you choose value and receive dividends, as long as you are young you should always try to reinvest the dividends you receive, because they’re going to help you grow your portfolio faster.

My suggestion is to set up a dividend reinvestment plan (DRIP):

This way, when you earn a dividend, that money is automatically reinvested back into buying more shares of the same etf. This process of constantly reinvesting your dividends back into buying more etfs which earn you even more dividends in the future is what makes you grow faster and faster because it creates an exponential growth of your wealth.

Lump Sum VS Dollar Cost Averaging

One of my biggest questions when I first started was:

Should I invest all my money at the same time, or do it gradually?

There are moments in which it’s better to invest a lump sum. For example, after a big crash you know that the stocks and ETFs are cheap compared to their real value, so if you have a good amount of money you should invest it all together.

In general, though, for most investors the best way is to invest using the Dollar Cost Averaging method. This simply means investing the same amount every month, every year, regardless of the current value of the ETF.

This method is great for many reasons: 

  1. It’s easier to budget your salary and say for example “15% goes every month to the S&P500”
  2. You can easily automate the process with your brokerage app so you don’t have to think about anything
  3. You’re actually going to get a better return in the long term because the truth is: we are humans and we make emotional disasters. So whenever an ETF has grown a lot in price, namely it’s expensive, we buy more because we are hyped by the recent growth. And whenever the market crashes and the ETFs are cheap to buy, we buy less because we are afraid. So normally, in the stock market people do the exact opposite of what they should do.

How much should I invest?

This is a question I get asked a lot of time. The answer depends on your income and your final goal. To help you define how much you need to invest I prepared the google sheet file above, which I’m going to make available to you for free through this link.

This table tells you how rich you’re going to be in the years to come depending on how much you invest.

Let’s say you start with an initial capital of $0, and you want  to invest in the S&P500 that as I said for the last 100 years gave an average annual return of 9-10%. Let’s put 9% here:

Now this is where it gets interesting, because by writing how much you’re going to invest every month, you can see how much your wealth grows every future year. For example if I invest $500 every month, after 10 years I’m going to have $96,757.14. After 20 years $333,943.43. After 40 years, I have over $2.3 Million, and this having only invested $240,000 in a lifetime.

You can download the google sheet completely for free from this link.

When should I start?

Another question that everyone asks is “When should I start?” and the question usually comes up because we always have the fear that the stock market has grown too much and a crash is coming and we are going to lose all our money.

To answer this I’m going to show you a really interesting study by Schwab. Schwab proves that trying to time the market is always a bad choice and instead you should start investing as soon as possible.

The research studies the performance of five hypothetical long-term investors following different investment strategies. The 5 ideal persons are Peter Perfect, Ashley Action, Matthew Monthly, Rosie Rotten and Larry Linger. Each received $2,000 at the beginning of every year for the 20 years ending in 2022 and invested the money in the S&P 500.

Peter Perfect was a perfect market timer and was able to place his $2,000 into the market every year at the lowest price of the year. 

Ashley Action took a simple, consistent approach: Each year, she invested her $2,000 right away.

Matthew Monthly divided his $2,000 into 12 equal portions, which he invested at the beginning of each month using the dollar-cost averaging method.

Rosie Rotten had incredibly poor timing—or perhaps terribly bad luck: She invested her $2,000 each year at the worst, most expensive moment of the year.

Larry Linger, well, Larry left his money in cash. He was convinced that it was better to wait for the next crash before investing, so he ended up never investing his money.

Here’s the wealth of our 5 friends after 20 years:

There are many conclusions you can draw from this, but the most interesting is that even Rosie Rotten, which always invested in the worst moment of the year, ended up with double as much money as Larry which didn’t invest at all. And the difference with Peter, which always invested in the best moment of the year, isn’t even so big.

When is the right time, then?

So when is the right time to invest in the stock market? The right time is now. If this post was helpful, consider leaving a comment and subscribing to my youtube channel to stay tuned on future videos. Thank you so much!

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