We all invest for different reasons.
Some save up and invest to see their child through university, some wish to buy their dream car or set foot in Europe for a snowy vacation; while others invest because it is just so much fun (that’s us at The Smart Investor!).
Whatever reason that people invest for, the desired outcome is always the same — we want our money to grow.
The stock market is one of the best places to grow our money and build lasting long-term wealth.
But not everyone has the time or ability to study individual companies and invest successfully.
For such individuals, the next best alternative would be low-cost index funds or exchange-traded funds (ETFs) that track market indices, a move that Warren Buffett approves of as well.
Advantages of index trackers
One of the benefits of owning index trackers is that it allows investors to invest in a broad basket of shares in one go.
For example, in Singapore, two ETFs track the Straits Times Index (SGX: ^STI).
They are the SPDR Straits Times Index ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B).
Investors who own these index trackers, are in fact, owning actual shares of the STI’s 30 constituents, which consists of some of Singapore’s largest publicly-listed companies such as telecommunications operator SingTel (SGX: Z74) and South-East Asia’s largest bank DBS Group Holdings (SGX: D05).
While it’s true that investors in the ETFs would be able to own 30 different shares in one fell swoop, there are also risks present, chief of which is the outsized influence that a handful of shares has in determining the index’s movement.
After all, the three local banks make up nearly 40% of the index’s weight.
That said, an index tracker is still one of the best avenues available for an investor to gain broad exposure to the market.
A steady annual return
To find out about the kind of returns an investor could have obtained with ETFs, let’s take a look at the long-term returns for the SPDR Straits Times Index ETF.
From its inception on 11 April 2002 till the end of May 2021, this index returned a steady annual return of around 6.6%.
Based on the Rule of 72, this means that you will be able to double your money in 11 years.
To double your money in a slightly shorter time, you can consider investing outside of Singapore.
The 500 best companies in the US are represented by an index called the S&P 500 Index (INDEXSP: .INX).
You can easily purchase an ETF sold by Vanguard that mimics the performance of this well-known index.
Vanguard’s S&P 500 ETF returned an average annual return of 15.8% since its inception in 2010.
In essence, you can place 90% of your money in the Straits Times Index ETF and 10% in the Vanguard ETF.
The performance will work out to be around 7.5% per year, which will double your money in exactly a decade.
The caveat, of course, is that both the indexes have to produce the same returns in the past.
It is possible the duo’s past performance may not be repeated.
Notably, the STI only returned 3.6% over the past 10 years prior to the end of May 2021. Similarly, the long-term return of the S&P 500 is closer to 10% per year.
Get Smart: Stay the course over the long-term
Here at The Smart Investor, we don’t view the stock market as a place to get-rich-quick.
For investors who stay the course and invest regularly, the payoffs can be good.
We believe that the best person to manage your finances is you.
Even if there’s a lack of time and ability to study individual companies for investment, it is still worthwhile to know what the stock market can offer and help you to grow your nest egg.
A great way to start is to explore investments in ETFs that can help to grow your wealth steadily over years or even decades.
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Disclaimer: Royston Yang owns shares of DBS Group.
