ETF Investing for Beginners: Avoid this £350,000 mistake!

If you're new to investing and you don't know where to start, then this is the video for you. I spent my career developing a strategy as an active manager, somebody who picked stocks for a living. And it enabled me to quit the rat race in my early 30s. And I've since been traveling the world. So let's get right into it and I'm going to offer my perspective on the content here.

Here is why I don't invest in the S&P 500. The point of a broad index fund is to diversify your risk. You want to be in as many sectors, companies and countries as possible, right?

Let's begin with this. Why do you want to be spread so thinly rather than only owning the best or what I believe in? It's because you don't know what you're doing. The reality of investing in an etf, something that tracks the entire market, is that it will only ever deliver the same performance average returns, that's the average of the best companies and the worst companies in that market. So whilst it ensures that you do have some exposure, though tiny, tiny exposure to winners, it also guarantees that you'll have a similar exposure to the losers in the index. So if you could only omit the losers in that pool, you would already see an edge to boost your performance.

So if one single company goes bankrupt, you don't even notice it.

Okay, so you're unlikely, highly unlikely, to encounter companies going bankrupt inside of your portfolio if you actually do some fundamental analysis. So ironically, by investing in an etf, you are exposing yourself to that situation. You are creating it where it didn't exist.

The problem with The S&P 500 is that it includes only US companies.

And whilst that's true in terms of it only includes US listed companies, the reality is that those companies get about 44, 45% of the revenue, I think, from overseas. They're multinationals, the big blue chips. They're not domestic players, unlike small caps.

Are typically, and right now, the US is the biggest stock market in the world, accounting for 65% of the world capitalization. But if your goal is to hold an index fund or an ETF for the next 20, 30 years, can you be still certain that us will be the best country in the world, stock market wise?

No, of course we can't predict the future. But all you're doing by adding countries to your portfolio through different ETFs is basically picking countries in the same way that you should, in my view. Otherwise pick single stocks, for example.

Let's Say that China stocks start overperforming in the long term. Money is all in the S&P 500. You won't benefit at all from this.

Okay, so what that's speaking to is fomo, the fear of missing out on returns. But the flip side of that is that China could just as easily underperform as it has done for a bunch of time now, for many years. Is it more or less likely that the fundamental trends that have seen the US become dominant globally will continue or reverse? I would argue that the momentum is more likely to continue. The point here is that you could just as easily be exposing yourself to underperforming markets under the guise of not missing out on positive returns there. Let's move on to the next video.

Here are the only three ETFs that you will ever need for the rest of your life. And an ETF is a basket of similar stocks that is perfect for beginners. So, number one is swda. It gives you access to the global economy by investing in thousands of companies worldwide like Apple, Nestle and Toyota.

That's completely fair. SWDA is basically the MSCI world developed markets ETF2XMMs.

It focuses on the emerging economies like China, India and Brazil.

So what Vittorio here is doing is basically gaining exposure to the total global stock market, developed as well as emerging markets. And I don't necessarily agree that having any emerging market exposure is worthwhile.

Number three, eqqq. This ETF includes the biggest tech companies like Microsoft, Amazon and Nvidia.

The issue here is that you're going to get a lot of overlap. For example, Microsoft, I think, currently is the biggest weighting in the S&P 500. And it's also a major weighting in the MSCI World Index, the Global Developed Market Index. Now, Nvidia gets the majority of its revenue from overseas. Without realizing it, you're tilting your portfolio more globally again or further away from the us even when you think you're adding more US companies. So this is where it just begins to get confused and messy. It's diversification. And the more broadly you invest, the more risks you are ultimately exposing yourself to. And this next bit is what gets me as well.

And in some years you will even make a 50% return on this.

It's not cool to position historical returns as being indicative of future results. I will never, ever give you a number of what I expect the market to do or my portfolio to do beyond what the historical tendency has been over a century plus. It's about 10.5% before inflation, which comes in at about 3.1% in the US if the beta of, let's say a tech stock in the NASDAQ is 1.2, it will rise or fall 20% more so 1.2 times. But yeah, let's, let's move on from this.

I have £10,000, never invested before.

Where should I start?

Okay, so the worst thing you can do is start with individual stocks instead. You want to start with these three ETFs.

Okay, here we go again. Now I understand why he's suggesting that ETFs are the place to start. It's assuming that in the beginning you will lack the knowledge to pick single stocks. But if you never bother to learn because you always take the easy option in settling for average by just buying and holding an etf, then you're never going to learn, you're never going to develop the knowledge of how to do this for yourself. And when you are in your 20s or just starting out, that's when you have the most time and opportunity to take risk. You have time to recover from mistakes. That's precisely when you should be looking to work things out. And that's exactly what I did in my 20s when I was developing my strategy in the city. By 34, it enabled me to quit the rat race and travel the world. The difference that just 2% per year over the market would make for, let's say a 20 year old beginning with that 10k is something like 350 grand after inflation held through until retirement. Studies have shown that there are multiple sources of edge guys, whether it's style factors, so quality for example, which is why I focus there your time horizon. So investing over multiple years, ideally two or more years, or in concentration, running a more concentrated portfolio, in other words, not diluting your bets. As Stan Druckenmiller says, the majority of your performance comes from two or three positions, typically as much as 70 or 80% of your overall portfolio. Spreading yourself across hundreds, maybe even a thousand positions with various global ETFs. Whilst it guarantees that you'll have average returns by having exposure to both the best and the worst performers in the index, you could already do better by simply eliminating the worst in that universe and then beginning to fish in a positively skewed, so positively biased pool. So I don't mean to kind of beat down on Vittorio and on this particular creator, but I wanted to offer my perspective as an active manager, somebody who did it professionally on what is becoming a really noisy echo chamber online for investors. When it comes to passive investing in ETFs, I don't know of any other pursuit, any other endeavor in life where we strive for average. I know some people may settle for average but I don't know anybody who strives to achieve average and that's what investing in ETFs is ultimately delivering. We should strive to figure out how the world works, be curious, be competitive at least inwardly with yourself and try and develop so that you could potentially make 350k more in real terms with only 10k starting out. That's before paying in a few hundred pounds a month over that time frame where the results are obviously exponential from there with even just a 2% edge. So if you want to see how I do it, follow me on Instagram, send me a dm, type the word training in there. I'll send you across a link on an automation due to my free training which shows you exactly how I do it. Hope you enjoyed that. Take it easy.