The Simple 2-ETF Strategy Every Investor Should Start With
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Over the next several weeks, The Juice will methodically create a long-term portfolio that blends traditional with alternative investments and merges capital preservation, income generation and aggressive speculation. We’ll detail each step with our rationale, illustrations and examples. Today, we start with ETFs. Tomorrow and Thursday, we deal with individual stocks before getting back to ETFs and other types of investments. Along the way, we tie it all together separating The Juice from the pulp. Here’s where we think a lot of investors go wrong. They want to move right to the “exciting” stuff. When many people think of investing they think of making lots of money fast. A difficult thought to resist during a time when so many stocks have gone up so much and the broad market has performed super well. In practice, getting to the so-called exciting stuff — which is, let’s face it, individual stock picking — results in a non-strategy. People poke in the dark picking stocks based on little else than what others are doing and how their gut feels about it. Momentum trading doesn’t mean you buy a stock because you think it will keep going up or down. Anyhow, The Juice looks at long-term investing like this. Some people say you should make your bed each morning so that — right away — you will feel like you accomplished something, thereby providing a solid base from which to start the day. |
Continued…
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Expanding it out, there’s something about having clean and well-organized spaces to work and live in. Whatever that means to you. Here again, when you have an orderly baseline to start from, it’s much easier to build something big and comprehensive. It’s much more difficult to make something — such as your portfolio — big and comprehensive when you start from a poorly focused default. Therefore, as The Juice sees it, a vast majority of retail investors, save the handful who are rolling in serious dough, should start their investing journey by purchasing two ETFs.
The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ). Over the last five years, SPY has returned roughly 85%. Over the same period, QQQ has generated a roughly 150% return. These two ETFs, which effectively give investors access to the broad US economy (SPY and QQQ) with a focus on tech (SPY, but more so QQQ), have gone up in a straight line over time. They both have super low expense ratios, which means you’re giving fewer investment dollars to management to run the funds. Because low-cost passive index funds don’t require as much work as other types of ETFs. No doubt — this is not the sexiest-sounding strategy in the world. In fact — in all seriousness — it might be the most boring. However, it’s supposed to be boring. You spread initial capital between SPY and QQQ, then you make additional investments at regular intervals. You’re dollar cost averaging into these ETFs, which means you buy more shares when the price is low and fewer shares when the price is high. While it might be tempting to skip this step and buy the top-performing names in the stock market (i.e., the top names in SPY and QQQ!) individually, this doesn’t make a whole ton of sense if your goal is a diversified portfolio that you expect to stand the test of time. One that preserves capital, grows your nest egg and generates some re-investable income (yes, SPY and QQQ pay regular dividend distributions!). This isn’t to say there’s no place in a long-term portfolio to buy individual stocks and to buy more of the names you’re most bullish on. We’ll cover these areas over the next couple of days. However, it is to say that you should not go anywhere else with your money until you set yourself up in SPY and QQQ. The Bottom Line: The Juice really doesn’t think many investors should deviate from a SPY/QQQ-first strategy. However, there’s one exception. You gotta give Vanguard credit for pioneering the low-cost, index ETF space. So we added a sixth spot to what is usually the Trackstar top five. The Vanguard S&P 500 ETF (VOO) does basically the same thing as SPY with near-identical returns, except it does it for a slightly lower expense ratio of 0.03% versus SPY’s 0.09%. Not a massive difference, but it’s also not a pain to go with VOO. Also, if you’re investing through a workplace plan, you might see it come up. Rest assured that, like SPY, VOO passively tracks the S&P 500 Index. |
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