Be Better than the ProS!
Control and Flexibility
When you manage your own investments you have full control over your portfolio and investment decisions - and the fees you pay. This control allows you to tailor your investment strategy to meet your specific financial goals and risk tolerance. You can easily adjust your portfolio as needed, without having to wait for a financial advisor to do it for you.
Cost Efficiency
One of the most significant benefits of low-cost index funds is their cost efficiency. Traditional mutual funds and portfolios administered by wealth managers typically charge high management fees that can range from 1% to 2.5% of your assets.
In contrast, passive index funds have much lower expense ratios, often ranging from 0.06 to just 0.2% This cost difference can have a substantial compounding impact on your investment returns over time, allowing more of your money to work for you. For example, the difference between a fee of 0.25% and 1% on a portfolio of $100,00 may seem small, but over 20 years, this difference can diminish portfolio returns by almost $30,000. ZSP, a low-cost ETF that tracks the U.S S&P 500, has a Management Expense Ratio of 0.09%. That means an investor can make a $1,000 investment in the world's largest index for just .90 cents!
Diversification
Low-cost index funds offer instant diversification by holding a broad array of securities within a specific index, such as the US stock market or Canadian TSX. Why engage in the costly and risky process of betting on individual stocks when you can buy the whole market, or as others have noted, why search for the needle when you can own the haystack?
Diversification helps mitigate risk by spreading your investments across multiple companies and sectors. As a result, the performance of your portfolio is less likely to be affected by the volatility or poor performance of a single company or industry. Diversification is a key principle of sound investing, and index funds make it easier than ever to achieve.
Transparency and Simplicity
Index funds are known for their transparency and simplicity. Since these funds track specific indexes, you always know exactly what you are investing in. Do you want to own Apple stock? Buy an S&P 500 index fund such as ZSP or XSP and your investment would automatically provide a 7% weighting in Apple, as of January 2025. This transparency makes it easier to understand your investments and make informed decisions.
Furthermore, the simplicity of index funds means you do not need to spend time researching individual stocks or market trends, making them an ideal choice for busy individuals or those new to investing.
The Result: Become the Investing Equivalent of a Scratch Golfer!
If you have ever golfed, you understand how difficult it is to shoot a par score over 18 holes. Investing is no less challenging. Professional money managers are always trying to "beat the market", and charging considerable fees to do so. But evidence (and Warren Buffett's side bet) demonstrate that the vast majority of fund managers actually underperform the market over five and ten year time periods. They play bogey golf - or worse once you include the cost of your fees!
You can beat the pros over time and become the investing equivalent of a scratch golfer simply by investing in low-cost, broad-based index funds that give you the market return. Investing in the market, rather than trying to "beat" the market is like getting a par on every hole and evidence clearly shows that this approach works over time. Capital Perspectives can help you follow the evidence.
