Why Diversified ETFs Are Your Best Bet in the Long-Term

patternHumans love to recognise patterns and one of our greatest skills is our ability to reason. When we observe a pattern happening in the present we can make logical predictions about the future.

Extrapolation

This skill is called extrapolation. If the pattern happens to be governed by a scientific law our future predictions are guaranteed. Unfortunately, however, if the pattern is based on random factors our predictions will be less reliable.

When it comes to money management and investing we can’t help but make predictions about the future. Any economist can tell you the historical rates of growth for the stock market and our logical minds place great confidence in that trend continuing into the future. Unfortunately the stock market isn’t governed by scientific laws but rather human decisions.

Downtrends (Recessions)

downtrendSo what happens to our confidence when we experience a downtrend in the market which contradicts the historic trend? It can be a real blow to our confidence. Interestingly history still provides an answer to this situation since there have been many historic market downturns (recessions) which occur in a remarkably predictable manner. The end result is always an upturn and return to the historic pattern of growth.

As anyone who is tracking their investments this year can attest, recessions are not pleasant and definitely hurt our confidence. It’s difficult to believe in a long term trend of growth when your investments are down 15% this year alone. But believe it you must if you are to be a successful long term investor.

Rebalancing Your Portfolio

My strategy has been to rely on funds that have a long history of growth and can weather the market downturns. There are currently exchange traded funds (ETF’s) which have global diversification, periodic rebalancing, and as a bonus industry leading low, low, management fees. Since these funds are based on a long history of performance, there is little speculation and guesswork.

Diversification

Diversification is maximized, meaning if one sector or individual stock does poorly the impact to the overall fund is minimized. Two examples of these funds are XGRO (80% stocks, 20% bonds) and XBAL (60% stocks, 40% bonds). The fund you choose is a personal decision based on risk tolerance; bonds are the safer investment but stocks historically outperform bonds over the long term.

Buying shares of either of these funds is a perfect example of one stop shopping for a global portfolio of stocks and bonds. Over the long term these funds have performed well and by extrapolation we can predict they will continue performing well in the future.

No Guessing

I refuse to make guesses when comes to investing; the comfortable route is an all in one fund that relies heavily on the historic patterns of long term growth. It’s a classic example of extrapolation with low risk and high probability of success.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

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