Long-term investing using Exchange-traded Funds (ETFs)

Actively planning to grow your wealth over time can help you establish a peace of mind regarding your own future.

One of the cheapest and robust ways to do so this is to invest into a mix of Exchange-Traded Funds (ETFs).

Long-term ETF investing can benefit your trading

If you are a new trader, then you are likely to be experimenting with different techniques and possibly losing small amounts of money. Engaging in trading and long-term investing at the same time can be a way of making more money over the long-term, than you are losing whilst learning in the short term.

There are also psychological benefits to investing alongside trading, because the pressure of making money with trading is lifted with the knowledge that you are making money with long-term investments. It means that you are able to take a small amount of capital for both your long-term investment for, say, retirement, and a separate amount of money for trading. You can keep these two sets of monies separate, and so if you lose on your trading account, this will not affect your long-term wealth growth.

Without the added pressure of having to make money long term with trading, it is easier to learn trading with real money.

Achieving long-term wealth with ETFs

ETFs are investment funds traded on stock exchanges. An ETF holds assets such as stocks or bonds and its price trades very close to its net asset value over the course of the trading day. They are attractive as investments because of their low costs and the ability to buy and sell them on the stock market, making them the most popular type of exchange-traded product.

In contrast to actively managed funds you do not have to pay an initial fee, nor an annual management fee. The effective yearly cost of most ETFs is less than 0.1%. At the same time, they offer great benefits such as diversified access to an entire index or segment. An ETF might e.g. replicate the performance of over 3,000 different stocks.

Why you should diversify through multiple ETFs

While an ETF is diversified in itself, you should not put all of your capital into one single ETF such as a US Stocks ETF. You should also invest some of your pension money into bonds and diversify across regions.

Depending on your risk tolerance, you put more or less of your capital into the various segments. Stocks and real estate are historically more volatile, but offer higher returns, while dividend stocks, bonds and Treasury Inflation-Protected Securities (TIPS) help reduce volatility, but present lower yields.

Regionally, U.S. stocks and bonds have historically higher returns than European and mature Asian ones and lower returns than emerging markets which in turn have the highest volatility. The best long-term return is expected by diversifying across these regions.

The following table presents the leading ETFs, according to criteria of liquidity and cost.

Segment (and ETF)Why?% of Portfolio (low risk)% of Portfolio (medium risk)% of Portfolio (high risk)
US Stocks (Vanguard VTI)

US stocks are an ownership share in US-based corporations. US stocks act as the core asset class because history shows that they offer significant returns over the long run. While more volatile than bonds, US stocks offer a great risk-adjusted return.

8%18%20%
International stocks (Vanguard VEA)

International stocks are an ownership share in foreign companies in developed economies, such as Europe, Australia and Japan. Foreign stocks differ from US stocks in two important ways: Firstly, because they react differently to economic situations and so help reduce a portfolio's overall risk. Secondly, foreign stocks provide indirect exposure to currency fluctuations. The historical returns of foreign stocks are lower than US stocks and have higher risk, so the main reason for investing in foreign stocks are their diversifying qualities.

5%14%18%
Emerging Markets (Vanguard VWO)

Emerging markets stocks are an ownership share in foreign companies, in developing economies like Brazil, Russia, India and China. Emerging markets stocks offer additional diversification because these investments respond differently than developed economies. The historical returns of emerging markets stocks are higher than US stocks, with higher risk. Emerging markets add the possibility of higher returns to a portfolio and additional diversification.

11%10%31%
Dividend Stocks (Vanguard VIG)

Dividend growth stocks are US stocks that have a history of increasing their dividend payouts over time. They tend to be large-cap well-run companies in less cyclical industries and thus less volatile. As of this writing, many companies in this asset class have higher dividend yields than their corporate bond yields and the yields on US government bonds. In the current low interest rate environment, dividend growth stocks emerge as an asset class that offers an income stream and capital growth potential.

5%15%5%
Real estate (Vanguard VNQ) (for international real estate, check Vanguard VNQI)

Real estate represents investments in real estate companies that provide exposure to commercial properties, apartment complexes and retail space. real estate offers both recurring cash that is distributed to shareholders and an investment in the long-term value of the properties. Real estate also acts as a hedge against inflation.

5%9%16%
Treasury Inflation-Protected Securities (TIPS)
(Schwab SCHP)
Treasury inflation-protected securities (TIPS) are inflation-indexed bonds issued by the US federal government. Unlike nominal bonds, TIPS’ principal and coupons are adjusted periodically based on the consumer price index (CPI). Although TIPS currently have historical low yields, their inflation-indexed feature and low volatility makes them the only asset class that can provide income generation and inflation protection to risk averse investors.19%0%0%
Corporate Bonds (iShares LQD)

Corporate bonds are debt issued by US corporations with investment-grade credit ratings to fund business activities. They offer higher yields than US Government Bonds due to higher credit risk, illiquidity and callability. In contrast to the US government, most companies have gone through a de-leveraging process and strengthened their balance sheets.

35%25%5%
Emerging Market Bonds (iShares EMB)

Emerging market bonds are debt issued by governments and quasi-government organizations from emerging market countries. They offer higher yields than developed market bonds. Historically, emerging market bonds had serial defaults in the 1980’s, 1990’s and even 2000’s. However, the world has changed, where investors today worry about potential defaults from developed market bonds rather than emerging market bonds. Emerging market countries, with younger demographics, stronger economic growth, healthier balance sheets and lower debt-to-GDP ratios, have less risk than most investors realize with respect to borrowing money.

12%9%5%

The ETFs used here have been chosen due to their high liquidity and low expense ratios. The selection is not a recommendation. tradimo is not a regulated financial advisor and you should understand the risks you are entering by purchasing them by carefully reading the information materials on the respective ETF's website.

How to buy ETFs

You can trade an ETF via any bank and some brokers. At tradimo, we are collaborating with CapTrader where a typical ETF purchase costs $2.00. This is much cheaper than at most banks and brokers.

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