Why I choose to invest in Index Funds and ETFs Instead of Individual Shares

I was inspired to write this blog after a client asked me if I select shares directly.  Today, I'm sharing why I choose not to ‘pick’ individual shares and why Index Funds and ETF’s (Exchange Traded Funds) fit for me.

Investing in a specific share means that you own a small part of a single company.  To create a portfolio of shares requires making a series of informed share purchases in a way that creates diversification while at the same time managing risk.

Do I know what I’m doing here? To attempt to understand the fundamentals of a specific share requires serious research into that company.  And with little chance of a positive outcome.

Analysis of a company demands thorough research of the company’s fundamentals including financial reports, management credentials, overall business strategies and risk management policy.  If I want to compare different shares than I will have to repeat this again for each share.  Then, after making my decision I need to monitor performance and realign the asset allocation.  So ask myself two questions.  The first is “Am, I good at this?” and the second is “Do I really want to do this?”

Picture this: you're standing at a crossroads, one path leading to hilly, windy path of individual shares and the other to the straightforward land of Index Funds and ETFs. Which do you choose? Well, let me tell you why I opt for the latter.

Individual shares can be tempting, I get it. The idea of handpicking stocks and potentially hitting the jackpot is alluring.  But here's the thing—it's incredibly time-consuming. You've got to put on your research hat and investigate financial statements, track market trends, and stay on top of company news. It's a full-time job! And let's be real, who has the expertise, time or energy for that when life's already busy?

How do the Experts do it? Active fund managers are those that seek to outperform a selected share index.  They have sophisticated research tools and employ experienced, highly educated staff.  They are experts at this. 

Does it work? BUT, and I mean BUT … studies of long-term investment performance of investment managers demonstrated that over a 20 year period, 93% of the managers underperformed their chosen market index.  Similarly, over a 10 year period, 90% underperformed the market index (Fidelity 2024). 

I refer you to my previous article “The Best Investors are Dead or have a very Poor Memory”.  Extraordinary, and true.  In 2024 Fidelity carried out a study of their clients to find which group of account holders had the best-performing portfolios.  Over a 10-year period they discovered that the highest returns came from accounts where the account holder was dead.  YES DEAD.  The second-best performing group of accounts were owned by account holders who had forgotten that they had the investment.  YES FORGOTTEN. 

What we can learn from this is that successful investing is boring.  A set-and-forget investment strategy rewards patience while those who make short-term decisions, particularly emotional knee jerk responses to market booms and busts, will be punished.

Boring and also easy?  Consequently, I find passive fund managers very appealing.  Index Funds and ETFs are like the fairy godmothers of investing. They offer a fuss-free, set-it-and-forget- strategy that lets you focus on the big picture. No need to lose sleep over daily stock fluctuations. Plus, you're not putting all your eggs in one basket. By investing in a diverse range of companies, you're spreading out your risk and setting yourself up for sustainable financial health.

What are Passive Funds: Passive funds include Index Funds and ETF’s.  In general, both attempt to track an index by investing in shares that make up that index.  For example the S&P/ASX 200 is Australia’s leading share market index and contains the top 200 ASX listed companies by float-adjusted market capitalisation.  It accounts for approximately 80% of Australia's equity market.  An index fund will buy shares in the same proportion as is shown by the index.

ETFs, come in different flavours that cater to varying investment styles and levels of involvement - Active Self-Managed ETFs & Passive Fund-Managed ETFs. But for the purpose of this article, I’m only touching on ‘passive investing’.

Excerpt from Blog article ‘Shares, ETF’s & ASX’

‘An ETF is a managed fund that is listed on the ASX.  When you buy an ETF you are investing in the bundle of assets owned by the ETF.  These assets may include shares, bonds, property and other securities.  This diversification allows the investor to choose that mix of assets best suited to their risk profile.  ETF’s offer low-cost access to a diversified portfolio of assets.  This compares to buying a share where you are investing in one company only.  The choice of ETF’s is broad with over 320 ETF’s listed on the ASX’.

What does passive investing cost?  It’s cheaper.  Let’s talk about the cost savings? Lower management fees of ETF’s and Index Funds mean more of your hard-earned cash stays in your investment, working harder for you. It's a no-brainer for anyone who loves a good bargain without sacrificing growth potential.

In summary,  a professional fund manager makes investment choices aiming to mirror a particular index. This approach supports a 'set-and-forget' strategy. That translates to time-saving, energy saving and sanity saving…. for me anyhooo!!!  Because I’m letting experts handle the details. Passive ETFs allow your investments to grow in alignment with market trends, without requiring constant oversight.

Investors love compounding returns? Place your investment and then leave it alone.  The real magic of Index Funds and ETFs lies in their ability to grow your wealth steadily over time, like a well-nurtured savings account on steroids. The power of compounding returns works its wonders, and all you have to do is sit back and let time do its thing.

At the end of the day, investing is personal. It should align with your unique goals and lifestyle. For me and many others, Index Funds and ETFs are the stress-free path to financial freedom. They simplify the journey, allowing you to focus on what truly matters — living your best life, money worries not included.

As a financial therapist, my mission is to guide people towards their own brand of financial freedom, effortlessly. 

Here are my definitions of various financial stages;

 😒Financial Merry-Go-Round is spending more than you earn.

 ✅Financial self-sufficiency, is generating money from your work to pay your bills, save a bit.

🐚Financial wellness, is about generating money from your work and in part from a portfolio of investments. 

 💰Financial freedom means generating money wholly from a portfolio of investments to cover bills, funding your chosen lifestyle, treats & continue adding to your investment portfolio.

 Enjoy!

Jan

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