I didn’t including individual share investing anymore. I prefer passive investing and individual share picking take quite long time and the risk is quite high. I am gain and lost for some individual share picking for years, I think that it will most sensible to begin with ETF invest for youth. Passive income can save more time for youth to continue study and work hard for saving. It also will allow youth to start early to explore finance independence.
I will begin what Warren Buffet offered suggestions:
Warren Buffett suggested index funds
Legendary investor Warren Buffett invented the “90/10″ investing strategy for the investment of retirement savings. The method involves deploying 90% of one’s investment capital into stock-based index funds while allocating the remaining 10% of money toward lower-risk investments.
“Before we begin discussing ETFs, we should start by outlining what an index is. Index providers such as Standard and Poor’s will create a selection of securities (shares in a company) which are then used to measure the performance of a specific market segment, this is called an index. A simple example is the S&P/ASX 200 index, which tracks the performance of the Australian stock market by investing in the top 200 Australian companies based on their market capitalization (a measure of their size). Market capitalization is found by calculating the number of a company’s outstanding shares and then multiplying this by their price per share. Therefore, the S&P/ASX 200 index will be invested more heavily in larger companies due to their larger market capitalization.
What Is an ETF?
An ETF is essentially a managed fund that is traded on a stock exchange such as the ASX (Australian Securities Exchange). They can be bought and sold in the same manner as an individual share. Traditionally ETFs aimed to track an index such as the S&P/ASX 200 mentioned above. However, today some ETFs are listed on the ASX that are actively managed and do not track an index. In this article, we will stick to discussing ETFs that track an index
ETF providers such as Vanguard or iShares will select an index and seek to track this index as closely as possible, passing on the returns to their investors (after fees). This means that rather than having to buy all the shares listed in an index individually an investor can just buy an ETF that tracks the returns of the index. To do this the ETF provider will purchase individual stocks in the same proportion as the index so that the holdings of the ETF are as close as possible to those in the index it seeks to track.
For example, the SPDR S&P/ASX 200 ETF holds 7.69% of its total assets in the Commonwealth Bank of Australia, but only holds 2.56% in Woolworths Group Ltd based on their size in the index which is determined by their market capitalization.
When changes in the index occur, such as companies moving in and out of the index because they do not meet the criteria, for example being one of the 200 largest Australian companies based on market capitalization, as well as companies moving up or down in the index because of their growing or shrinking market capitalization, the ETF will mimic these changes to ensure that it is able to track its benchmark index as closely as possible. Therefore, if the S&P/ASX 200 returned 20% in a year, then an investor should expect that an ETF tracking this index such as the SPDR S&P/ASX 200 ETF should have also returned very close to 20% that year (before fees and tax).
It is not uncommon for the returns of an ETF to differ slightly from the returns of the index it tracks, even before fees are taken into account. For example, at the time of writing the iShares Core S&P/ASX 200 ETF has a return since inception of 7.61% p.a., while its benchmark index has returned 7.80% p.a. for the same time period, despite this ETF only charging 0.09% p.a in management fees. At times the after fee returns of an ETF may actually be better than that of the index it tracks. For example, the Vanguard MSCI Index International Shares ETF has had a return since its inception(after management fees, transaction, and operational costs) of 11.77% p.a, while the index it tracks has had a return of 11.64% p.a. These slight differences stem from the fact that the ETF and the index it tracks will typically have slight variances in the amount of their portfolio which is invested in each company. By chance sometimes this will mean the ETF performs better than the index, sometimes it means it will perform worse than the index, either way, it should be very close.
Index Funds vs ETFs
Index funds could be considered the predecessor to ETFs. Essentially an index fund is just like an ETF that tracks an index, the main difference being that an index fund cannot be traded on the ASX. Just because index funds were the predecessor to ETFs does not mean ETFs are a superior investment. Both investments come with their own advantages and many ETF providers offer both an ETF and an index fund that both track the same index. For example, Vanguard offers the Vanguard Australian Shares Index ETF as well as the Vanguard Australian Shares Index Fund, which both seek to closely track the performance of the S&P/ASX 300 Index. One major difference is that owning ETFs may facilitate trading rather than investing. Remember purchasing ETFs is intended to be a long-term investing strategy. If you think owning ETFs may tempt you to begin trading, then index funds may be a more appropriate investment vehicle for you. Below are some of the key features of ETFs and index funds.
ETFs
- Allow you to make irregular or large transactions.
- Easy trading on the ASX.
- ETFs trade throughout the day.
- Typically, do not allow you to buy fractional shares.
- Typically, more tax efficient because investors only pay capital gains tax when they sell their ETFs.
- Can trade at a premium or discount to their NAV.
Index Funds
- Easily make ongoing, small contributions.
- Set up automatic investment plans.
- Often have higher minimum initial investments than ETFs.
- Index funds trade once at market close.
- Typically allow you to invest fractional amounts (less than the price of a single share), meaning you get your money in the market sooner.
- Typically, less tax efficient because when an investor wants to redeem some or all of their investments the index funds must sell stocks for cash so they can pay the investor. This means they must pay capital gains tax on all the stocks they sell.
- Typically trade at NAV”