When you say stock markets, many recall the frightened or on the contrary euphoric expressions of Wall Street workers, steeply rising charts or panic sales and corporate collapses. But investing doesn’t have to look like this. If you want to make long-term profits, the best thing you can do is to completely lose your appetite for the manic-depressive environment of the stock markets.
Such a principle is the basis of so-called passive investing. This is a strategy where the investor does not try to pick stocks or time the best moments to buy and sell, but instead puts money regularly into indexes that track a larger part or even the entire stock market. As simple as it may sound, stock market math is not wrong in this case.
Jakub Dvořák, the author of the project, is also a believer in passive investing Broken piggy bank, which expanded from a blog about financial topics to a podcast and also a book that describes the entire issue of passive investing in detail. He also presented it in Vojta Žižka’s Investment podcast, which you can listen to below.
Dvořák is a bit of a phenomenon among individual investors. “I never fell into cryptomania. A lot of people beat me over the head, what kind of investor am I when I’ve never had a bitcoin.” Laughs. Perhaps even more surprising is that he never even owned any individual stock. He directed all his investments into so-called ETFs (Exchange-traded funds), i.e. exchange-traded funds. They combine dozens, hundreds, and even thousands of shares of different companies and are the basis for passive investing.
There are thousands of ETF funds in the world – some, for example, aim to copy the S&P 500 index, i.e. the five hundred largest companies on American stock exchanges. Others, for example, for the entire market segment, country, continent… Or simply all together.
“An investor with a passive strategy relies on long-term investing in broad equity instruments that grow over the long term. At the same time, they try to minimize costs, but also their business activity. He basically buys a part of the entire market and relies on it being higher than it is today in, say, thirty years.” explains Dvořák.
A logical question might be how do we know the markets will be higher in thirty years than they are now. A cynic might say that if they don’t, any investments will be a no-brainer by then. However, history brings clear statistics. If an investor spent at least twenty years investing only in the S&P 500 index at any time during the last hundred years, he could never make a profit as a result. Conversely, if he had remained invested in the same index for only five years, he could have appreciated his investments by a maximum of 36.1 percent, but also lost 17.4 percent. The uncertainty for a five-year horizon is therefore significantly greater, and practically disappears for two decades.
Of course, single-digit annual returns may not be attractive to many investors, so they may try to trade more actively and try to time the market. However, even here, stock market history offers harsh numbers.
JP Morgan for example counted, what happens to the money of an investor who actively buys and sells and unfortunately misses several days with the best earnings. If he were to miss only twenty of the best days from 1998 to 2020, his profit would be zero. Meanwhile, a colleague who passively lets the money lie in the S&P 500 index will earn 5.62 percent annually.
“Average investors are not doing well in the long term, and actively managed funds are not doing well at all. Not even professionals. Even they usually lag behind the indexes in the long term,” describes the author of The Broken Piggy. The data prove him right in this case as well. According to JP Morgan, the average investor earned 3.6 percent per year between 2002 and 2021, far behind real estate funds, bonds and even the S&P 500.
If you are not looking for quick and risky earnings, it is probably not worth choosing individual stocks carefully. Companies disappear from the stock exchanges more often than many may admit. And the chances of you picking a winning one are very small. Half of all companies that in any year enters on the stock exchange, it will disappear again within 10.5 years. The advantage of an ETF, on the other hand, is that its operator usually clears it of bad companies himself, so the investor does not have to worry too much about individual failures.
However, the passive investment strategy also has one obvious disadvantage. “It’s just boring. You only need one index and you don’t have to do anything for the rest of your life. I myself spend about two minutes a month investing,” describes Dvořák and also mentions his favorite ETF fund iShares MSCI World. This is one of the funds containing thousands of companies from all over the world, and for the last ten years its annual return is over nine percent. He himself buys through the Degiro platform, but platforms such as the Czech Porta can also be used for some ETFs.
However, passive investing can work especially for those savers who have an investment horizon of several decades in front of them. Even so, the strategy has its risks – you need to pay attention to the fees of each fund, for example. Even just a few tenths of a percent of the difference can, in the long term and in absolute terms, mean big profits that the investor will lose. A list of the best ETFs and information on how to build a specific portfolio including the entire interview with the author of The Broken Pig, can be found on Vojta Žižka’s Patreon.
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