Long-term investing is like a cheat code to achieve financial peace.
If I start early, I can transform my financial fate without too much effort.
And the best part?
This invest for long term strategy can be partially automated.
In this post, I explain how do I invest for the long term. Specifically:
- The 2 types of power asset class I need
- Examples of how do I setup my ETFs portfolio
- The typical mistakes people make
Now, let’s master this boring (but stunning) long-term investment strategy and smile.
Come on. Let’s jump in.
WHERE TO INVEST long term
There are only two ways to succeed with money:
- Long-term investing in the stock markets
- Invest aggressively in real estate
I believe that financial markets are the best tool and then they are very accessible.
What it comes to investing I need to pick the asset classes.
These are the only serious financial investment classes to choose from:
- Commodities (physical gold stored online)
You’re about to read how I use the first two asset classes to get huge returns with a +15 years time horizon.
I work, I save, and now what?
That’s everybody’s story.
I get paid.
Money goes to my bank account.
My options are:
- Spend it all.
- Let it rot in the bank
- Invest it month after month
The first two options are a bloodbath. Especially the first one, even if many people do it.
If you’re reading this article, you’re on track for financial success.
I can give my two cents because I’ve done all three. Spend, wait, invest.
💄 WHY LONG TERM investing IS SEXY
Investing in the long term with some strategy is a statistically proven way to earn money on the stock market.
It worked in the past and it is likely to happen again.
Government bonds do not pay any interest these days. I know that I have to take a calculated risk to get a result. There are no shortcuts, but I know what I’m doing.
Why is it so likely to make money on the stock market in the long term?
I analyzed stock index data for the previous 100 years.
Some markets have been generous to investors over the long term, especially United States stock indexes.
Those who have invested in the stock index for many years in the past have had stratospheric returns.
Much of the wealth of American citizens comes from investing in their home stock-markets.
Many in Europe do not believe that investing in the stock market can generate private wealth.
Some of the main US stock market indexes from 1926 to 2010 generated average annual returns of up to 12%. The European indices have not performed similarly and they are decoupling since 2011.
Single stocks OR MUTUAL FUNDS?
Investing in single stocks picking the best ones seems the best strategy.
It is not.
Dividend investing is the most common way to start investing for the long term, but it ends up to be quite dangerous.
The dividend investor must be ready to balance the dividend stocks portfolio every there and then. This process needs knowledge, passion and cold blood.
Let’s be honest: Stock picking strategy is not suitable for everyone.Investing in the stock market is not for the faint-hearted. So what to do? Click To Tweet
Besides to this, tax optimization of an equity portfolio is a tough job.
For all these reasons, I prefer ETFs to single shares.
ETFs Vs. MUTUAL FUNDS
Here is why.
What is the difference between ETFs and Mutual Funds?
Mutual funds are investment vehicles managed by money managers.
ETFs can be bought or sold at any time, while mutual funds are only quoted at the end of the day, every day.
ETFs are like baskets of exchange-traded securities (more like shares) because I can buy and sell it whenever I want to.
On average, ETFs are less expensive and also tax efficient compared to the correspondent mutual funds.
The ETFs I am talking about today beat mutual funds.
That is why I always prefer ETFs to mutual funds, especially for long-term investment purposes.
🎥 Video: What are ETFs on Youtube
In 2 minutes of video play, this pretty girl will tell you what are ETFs.
ETFs are not an asset class, but a mean of access to asset classes.
ACTIVE Vs. PASSIVE MANAGEMENT
For this strategy, I need low-cost high-efficient tools.
I have more reasons to prefer passive tools against actively managed tools, and it is performance.
Data in hand.
91% of active funds (managed by humans and algorithms) do NOT perform better than passive index investors91% of managed funds do not perform any better compared simple index funds. Click To Tweet
The strategy explained
We’re starting. Hang in there.
If you already know what a dollar cost averaging plan is, you have an advantage, because the structure is the same and it’s all very simple.
This long-term investment strategy involves me buying at least 2 ETFs on a regular basis.
Monthly or quarterly.
Rinse and repeat for at least 15 years.
The ETFs I need will be geographically diversified.
If I only use two ETFs then one will include one of the most important stocks in the world, the other ETF will include the most reliable bonds in the world.
I can start with a large starting capital and then add a fixed contribution per month, or simply pour money every month starting from scratch.
This strategy makes sense and is safer if the time horizon is long. At least 15 or 20 years.
The stock markets in this long period will go up and down many times but nothing changes for me, because I am a long-term investor.
After 15 years the chance I have made a profit is statistically very high.Here is the only way to invest successfully in the financial markets without risking a heart attack Click To Tweet
One more goal: TO GENERATE SOME COMPOUND INTEREST
Compound interest is generated when I start to accumulate interest on the money I received from my previous investments.
- I invest 5000€
- After 1 year it becomes 5500€
- Instead of spending the 500€ earned, I reinvest it.
- I will now earn interest on 5500€, not only on 5000€.
Every year the money increases exponentially. It is so beautiful.
This long-term investment strategy works on this excellent concept but also on the fact that statistically, the markets have been growing in value in the long term.
↗️ WHAT KIND OF profits CAN I EXPECT?
I’ve done studies simulating how much someone who would have invested in this way for the last 100 years would earn.
Then I’ve found an excellent website that has made this simulations very easy to perform (and much better than me).
What happened to those who have invested like this in the past 50 years?
By doing simple simulations using the historical record of the markets from 1870 to 2019, I can expect (but have no guarantee) to achieve something like the following outcome..
Long-term investment potential:
100€ per month for 60 years becomes about 1 million 18.000€
200€ per month for 50 years becomes about 1 million 9000€
350€ per month for 40 years becomes about 860.000€
500€ per month for 30 years becomes about 577.000€
1000€ per month for 20 years becomes about 497.000€
2000€ per month for 15 years becomes about 455.000€
As we can see, super-powers are given by time more than by capital.
I love it.If at the age of 40 I start investing 600€ per month when I'm 65 I may have a portfolio of ETFs worth about 461.000€ Click To Tweet.
It’s never too late to start investing properly.
It’s only too late for people who never start anything and never finish anything.
I do not forget that past returns are no guarantee of future returns and that neither my capital nor returns are guaranteed.
Can’t I get the same (or more) buying single shares?
If I buy one share, one day it might be worth zero.
Sooner or later I will buy the “wrong” stock and more than one weak stocks.
If I buy a stock index (ETFs like the ones listed above) I buy hundreds of shares and thus it can never be worth zero.
BEST ETFS FOR LONG-TERM INVESTMENT
So, what are the best ETFs to invest in the long term?
Huston, we have a problem.
I have too many options. There are above 5,000 ETFs listed in the world today.
What are the best ETFs for me?
Using just one is not enough.
I can use at least these two ETFs:
A World Stock ETF
A World Bond ETF
If I want to improve my portfolio, I might add ETFs like:
An ETF replicating US markets (S&P500)
An ETF that is focused on real estate investments (REITs)
An ETF that replicates the price of physical gold (or maybe real physical gold)
An ETF that replicates emerging markets
An ETF investing in emerging bonds
An ETF of high dividend stocks (USA/World)
An ETF investing in corporate bonds (High-yield)
Each class will have a set of best ETFs for:
Distribution policy (Acc/Dist)
The best ETFs for the long term should be low-cost, accumulating and possibly domiciled in Ireland.[Gap]
🔴 Euro ETFs or US dollars ETFs?
I hate to answer “it depends” unless it really …depends.
Let’s say I am a European investor.
ETFs that invest in non-euro countries but are in euros are called “hedged”.
If I want to expose my portfolio to currency fluctuations, then I don’t buy ETFs only in euros. I could mix.
I don’t use “hedged” ETFs and I expose myself to exchange rate fluctuations. This is very personal.
HOW TO BALANCE an ETF Portfolio?
How many equity ETFs and how many bonds is fair to have in a long-term portfolio?
The “weight” of these ETFs in the portfolio depends on:
- My age
- My risk profile
- The duration of the investment period
World equity ETFs fluctuate a lot compared to bonds ETFs.
A basic rule of common sense to know how to divide the portfolio between equities and bonds is this:
How old am I?
If I’m 20 years old I’ll get 20% bond ETFs (and 80% equity), if I’m 40 years old I’ll get 40% bonds, and so on.
It makes sense because as I approach the end of the investment I will need to lower the risk, until I have mostly bonds (bonds).
💡 ETF EXAMPLES
I am NOT linked to any of the ETF companies I mention and this is NOT an investment recommendation.
Example of global stock accumulation ETFs:
Vanguard FTSE All-World (cost 0.22%)
MSCI World TRN-ucits (cost 0.20%)
Example of US stock ETFs with accumulation:
Vanguard S&P 500 UCITS (cost 0.07%)
Example of global bond ETFs:
Vanguard Global Aggreg. Bond UCITS (cost 0.10%)
All the ETFs I mention are accumulating..
None of these ETFs is the absolute best
I can replace any of these with other ETFs.
Some of these ETFs may have low trading volumes.
The other ETFs for long-term investment may be:
Emerging markets/Frontier markets
High dividend shares
Further details on long-term strategies and ETFs are in the newsletter. In the email, there are also ISIN codes for each tool plus a selection of other ETFs that I use.
ETF accumulating or distributing?
What type of ETFs should I pick? Accumulating or distributing ETFs?
I prefer Accumulating ETFs. They reinvest everything within the ETF itself and are fiscally efficient.
Distributing ETFs would periodically pay me a dividend.
I don’t want that.
In this case, I prefer ETFs that accumulate the outcome to fuel compound interest and also my portfolio efficiency.
Taxation of long-term ETFs?
Without going into detail, it is good to know that Irish taxation may be slightly better for several reasons related to the dividends from the underlying shares.
🔴 How to buy ETFs?
ETFs are easy to find.
Many banks offer ETFs, but the brokerage costs can be high and end up eating a slice of the return.
Degiro and Interactive Brokers are two popular choices, but look around, there are dozens of options available.
Investment strategies that I’d never use long-term:
I DO NOT invest with CFDs
I DO NOT invest in precious metals
I DO NOT invest in Cryptocurrencies
Bitcoins and cryptos are a gamble in the long-term, not an investment. There’s not enough historical track record that confirms to me that they will appreciate over time, although many people (especially Digital Nomads) will not agree with me.
CFDs work differently than funds and ETFs. They are not suitable for this purpose most of the times.
Art and watches are uneven sectors. It’s too difficult to use them in such a strategy.
“A diamond is forever,” but it’s so difficult to buy diamonds at a fair price. If I am not an expert in stones, I’d not invest in it.
📖 books to learn to invest Long-term
For me the main handbook of the long term investor in ETF is:
J.C. Bogle’s “The Little Book of Common Sense Investing”
This book explained to me step by step why the only way to ensure my long-term well-being is also through investing in the stock market in a specific way.
This article is inspired by the J C Bogle book and also by some episodes of this powerful podcast.
There is also another famous book by the “Spanish Warren Buffet” Francisco Paramesche is called:
“Investing Long Term -- My Experience as an Investor.”
I haven’t read it, but the description is very inviting: “…it gave its clients an average annual return of almost 16% from 1993 to 2014, compared to the 7.8% obtained from the Madrid Stock Exchange Index…”.The magic when you invest is not in making a couple of lucky hits. The real magic is doing magic for 20 years Click To Tweet
⭕️ The Strategy in a few words
First things first…
Why should I invest for the long term?
I consider investing this way one of the most profitable and safe ways to improve my finances in the long run.
Yes, I am also a Peer to Peer lending investor, but only a part of my capital can be invested in loans.
Sure, I could go to the bank and ask for a DCA, but the fees and commissions will undermine the outcome in the long term. That’s why the most efficient way is Do It Yourself for me.
Statistics are on my side. Time multiplies my efforts and my returns.
With peer to peer lending I could get similar results, but as I said, P2P can represent only a part of a balanced portfolio, not 100%.
How to start investing long-term:
I determine how much I will invest in the month/quarter
I set up an automatic transfer from my bank to my broker every month
I choose the broker, possibly an efficient one
I identify at least 2 ETFs that I need
I determine the percentage of equities and bonds in my perpetual portfolio
Every month (or 3 months) I buy the equivalent of what I have established in ETFs
I wait at least 15 years without ever withdrawing or interrupting the strategy
After 30 years of investing in this way just €300 per month, I can reasonably expect around €346,000. If I had invested only in bonds I would have only gotten about 125.000€. If I had left it in my savings account I would have had a negative return due to inflation.
Now tell me about yourself.
What do you think about it?
Which ETFs do you already use?
Have you ever thought in these terms?
Leave a comment!
✅ More details about this strategy are in the newsletter