Hi there,

Welcome to Finance Friday. Last week we looked at the different types of ETFs available. The list may seem overwhelming. But what if I told you most people could run their entire investment portfolio by just investing in one ETF? How I answer that is to think about the difficult questions most investors face and even put them off investing at all.

What is the most difficult thing about investing?

Some of the questions you probably ask yourself are:

• What shares do I invest in?

• Should I invest in different countries?

• How much money should I allocate to each investment?

• When should I buy?

• When should I sell?

• Will I make money?

• How much will it cost me?

I can give you a strategy to remove many of these decisions.

Why would you want to remove decision-making?

Investing is a psychological game and humans are very bad at it!

Do you know anyone who buys when assets are expensive, panics when the asset drops in value and sells when they are cheap? Perhaps this is you?

By removing decision making you are removing emotion from your investing decisions.

But, Iain, you haven’t answered the questions!

Well, let’s examine how ETFs can take care of most of these questions for you. As an example, I am going to use the Vanguard FTSE All-World UCITS ETF. To be clear, this is not a trade recommendation - that would be beyond the scope of these newsletters. However, this is an example of how powerful ETFs can be and there are other similar ETFs on the markets. Back to the questions.

What shares do I invest in?

If you were to try and create your own portfolio with individual shares you would probably look at companies in the news like Amazon, Microsoft, Apple, NVIDIA, Alphabet (Google), Meta (FaceBook) etc.

Look - they are all here in this one ETF:

Remember, this is in addition to another 3,655 shares as of the 31st March 2024. The decision of which shares to invest in is taken care for you based on the current market capitalisation (the value of each company).

In addition, you have exposure to different sectors:

Should I invest in different countries?

Most investors want exposure to the USA. But many people also want exposure to other countries. Again, this is all taken care for you based on market capitalisation:

How much should I allocate to each investment?

As you can see from the previous two sections it is done automatically.

When should I buy?

I will discuss this next week when I will introduce another concept to reduce decision-making.

When should I sell?

Ideally never! Just keep investing until retirement. However, if this is not the case you should withdraw funds when you need to make a major purchase - perhaps a deposit for a house or university tuition fees for your children etc.

Will I make money?

Past performance is never a guarantee of future performance. We should always invest for the long term and not worry too much about individual years.

As you can see from the numbers on the right of the table above, the benchmark (this is the index that the fund replicates) for FTSE All-World index is a respectable 8.65% annually over 10 years.

You do have to accept volatility, however. Although the benchmark lost 7.38% from April 1st 2022 to March 31st 2023 it gained a very nice 23.02% from April 1st 2023 to March 31st 2024.

How much will it cost me?

ETF fees can vary widely. As a general rule actively managed ETFs cost more than passively managed ETFs. The cost of owning an ETF is called the ‘expense ratio’. The expense ratio represents how much of the fund will be deducted automatically as fees.

For example, if an ETF has an expense ratio of 1%, for every 1,000$ you have invested the ETF automatically takes 10$ in fees.

When researching ETFs, look for TER (Total Expense Ratio).

Let’s look at some examples.

Vanguard S&P 500 UCITS ETF - TER 0.07% That is 7$ for every 1,000$ invested.

ARK Artificial Intelligence & Robotics UCITS ETF - TER 0.75%. This is 75$ for every 1,000$ invested.

The first example is passively managed tracking the S&P 500 while the second example is actively managed and over 10 times more expensive.

For passively managed funds I aim for a TER of about 0.25% or less. The Vanguard FTSE All-World UCITS ETF we have been discussing has an expense ratio of 0.22%. Please note that this is higher than the S&P 500 Vanguard ETF because it is a World fund - the S&P 500 ETF will be easier to manage.

As always, please remember that none of this information is financial advice. It is educational and will possibly provide you with some ideas to research further and/or ask your financial advisor.

Next Steps:

Next week, we'll discuss when and how to buy!

Acronym of the Day: UCITS

You will notice that every ETF that I have mentioned in this newsletter has ‘UCITS’ in the name.

UCITS is an acronym and can be pronounced like a word (yoo-sits)

UCITS stands for ‘Undertakings for Collective Investment in Transferable Securities and is a set of safety standards for funds based and marketed in the EU.

UCITS ensures these funds are transparent, well-regulated and can be easily bought and sold across Europe.

You do not need to know or understand the full details, but I recommend making sure any ETF you are considering has UCITS in the name if you are based in Europe.

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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