7 Years of ETF Investing What I Learned

7 years have now passed since I first started passively investing in index funds via ETFs together with my wife, with our ETF portfolio growing to 267.000€ since then. I've learned a lot throughout this period, which has led me to change my investment approach a few times since 2017. I've also made my fair share of mistakes, some of which may surprise you. Today I'm going to share my 6 most important lessons with you, and I'm hoping you'll be able to avoid some of my missteps yourself after watching this video. Let's get right into it, starting with how my investment approach changed over time. Lesson number 1. Keep it simple. It took me a while to learn this one. Let's go back to the beginning to show you what I mean. Since my knowledge was fairly limited at the time, in January 2017 I started investing in the stock market via a robo-advisor, which was meant to choose the right ETFs for me and to rebalance on a regular basis. But just 2 months later, after reading several books and doing a ton more research into the world of index fund investing, I realized I could easily buy ETFs directly on my own. That way I wouldn't only have full control over how my money was invested, but also save 0.8% in fees, which the robo-advisor was charging me on a yearly basis. Well, I still ended up overcomplicating my portfolio at the beginning, splitting my money into 6 ETFs, which you can see here. I felt tempted to try and beat the market, so I selected precise percentages to allocate to different regions around the world, including small cap stocks. At the time, I didn't consider how much more I would need to pay in trading fees to buy 6 ETFs on a regular basis, or the tax implications and costs that come with rebalancing. Now in hindsight, would all that effort have been worth it since then? As it turns out, no. I would still have underperformed a global one ETF solution like the FTSE OVALT. Then in September 2017, I finally realized that a 6 ETF strategy was way too costly and too cumbersome to maintain long term, so I sold 5 of the 6 ETFs I had and switched to a simpler 2 ETF strategy, 75% MSCI World and 25% MSCI Emerging Markets. Just out of curiosity, when looking back today, this one would have also underperformed just buying the market as a whole, since emerging markets performed very poorly over the past decade. Now, I could have left it at that, but at the end of 2018, I made the decision to simplify things further by only buying a single ETF, covering both developed and emerging markets on a market cap basis. I'm of course talking about the popular Vanguard FTSE OVALT ETF, the only ETF my wife and I have been buying ever since, first in the distributing version and then in the accumulating version from 2021 onwards, since the latter is a bit more tax efficient and automatically reinvests dividends into the stocks within the fund, saving us some time. We fell down to our older MSCI World ETF shares though, since these were nicely in profit and there's no point in selling them and having to fully tax these now, instead of later in retirement when we actually need the money. Also an MSCI World is still in line with a global investment strategy, since it has an overlap of around 90% with the FTSE OVALT. As you can see, the start of our ETF investment journey was quite messy and far from straightforward, so don't be too hard on yourself if the same happened to you. Luckily, we were able to avoid any costly mistakes throughout this period with our investment in the stock market, it simply took us two years to learn the benefits of keeping things simple by sticking to a one ETF solution instead of trying to outsmart the market. And thanks to our high 70% savings rate in large part due to our low expenses and total returns of 54.900€ since we started, our combined ETF portfolio is now worth 267.000€ 7 years later. By the way, you can find the best local brokers in Europe for ETFs linked down below in the description, which is a great way to support me if you'd like to. And while you're there, don't forget to subscribe to the channel so you don't miss out on any upcoming videos. Lesson number 2. It never feels like the right time to invest Somehow it never feels like the timing is just right. There's always something new to worry about every single year and a doubt that's going to change going forward. Had we listened to news headlines, we would still be standing on the sidelines today waiting for the right time to get into the market. Which means we would have missed out on average yearly returns of 10% since 2017 or 18.4% in 2023 alone, a year when everyone recommended moving to cash and bonds instead due to rising interest rates. Looking back, I'm grateful we didn't let any of that affect us and stuck to a simple buy and hold strategy. Still, that doesn't mean it has been easy either. We were down 5.2% in 2018, crashed 30% during covid in 2020 before recovering and 2022 was a difficult year as well, with our ETF portfolio dropping 13.3% in value. But corrections and crashes are a normal part of the journey and there's no point in worrying when the next one is going to occur, since they're impossible to predict. If you're investing long term and have a time horizon of at least 5 years, ideally 10 years or more, it's likely not going to matter anyway. Not only that, as you become more experienced, you might actually start to see market corrections as discount opportunities. Lesson number 3. Dividends are irrelevant. For the most part. When picking ETFs, make sure you always compare the total performance, so dividends and capital gains combined over long time periods, don't just look at dividend yields. After all, the total return you get on your investment is what matters the most to help you reach your financial goals. Here's the FTSE OWLed vs the FTSE OWLed high dividend yield for example. While the second one has a much higher dividend yield, its performance has been lagging far behind since it excludes high quality stocks simply because they don't pay out dividends. Now, when it comes to picking the distributing or accumulating version of the same globally diversified ETF, having dividends paid out to your account on a regular basis can definitely have a positive psychological effect. In fact, this may motivate some people to keep investing to increase this cash flow or to simply stay invested when the market is down. Meanwhile, when you invest into accumulating ETFs, dividends are reinvested into more shares of the stocks within the fund, additionally raising the share value by that amount over time. But when the market is in the red as a new investor, it may not be as apparent that you're still holding productive assets, since you're not actually seeing the dividends paid out in cash directly to your account. Whichever approach you choose, the total return is the same in both cases, minus taxes on dividends in most countries, which usually make distributing ETFs less tax efficient. That's one reason why we switched to only buying the accumulating version of the Vanguard FTSE Oval 3 years ago. Not only is it slightly more tax efficient in the long run, but it also makes our life easier, since we don't need to manually reinvest dividends on a regular basis. Lesson number 4. Patience is key. Passively investing in a global stock market index via an ETF may seem simple enough, but actually sticking to the strategy is not as easy as you may think. You can be sure there will be plenty of moments when it feels like you're wasting time holding on to your boring ETF, as the market is moving sideways or perhaps even going down for a while. Don't make the mistake of suddenly changing what was meant to be a long-term strategy by investing into whatever stock, sector ETF or risky investment has been running better lately in the hopes of generating higher returns quickly. Chances are, you're going to regret that later on. There's a reason why the vast majority of investors and even professional fund managers underperform the market over the long run. As Warren Buffett puts it, the stock market is a device for transferring money from the impatient to the patient. So be patient and don't look at your brokerage account every single day. Now, I'm not saying you can't take some smaller bets in single stocks, conservative ETFs or even alternative investments like crypto. It's your money, so of course you can, I would just urge you to keep this limited to a small percentage of your portfolio. For example, in my case, I'm willing to risk a total of 10% on highly speculative assets like Bitcoin and Ethereum. Meanwhile, for you, that may be something else. Speaking of that, if you're interested in my investment strategy and my unqualified return predictions for 2024, make sure you check out this video if you haven't seen it yet. Lesson number five, fees are important up to a certain point. The benefit of ETFs is that they enable us to diversify our investment into thousands of stocks while paying very low fees in the form of each ETFs TER or total expense ratio. But once you picked a global ETF with a TER of 0.22% or less, stop obsessing over ways to reduce this even further. However, it's likely not worth your time. Also, fund providers like Vanguard, iShares and Spyder are constantly working on reducing their fees for existing ETFs and I'm confident they'll keep being lowered in the coming years. Now, when it comes to trading fees, luckily, we live in a time when these have become extremely low using the best low-cost brokers in Europe. For example, on Interactive Brokers, I'm able to buy the Vanguard Fulci Ovalt for only 1.25€ in fees, either as a direct purchase or recurring investment, while Trade Republic only charges a flat 1€ fee for a direct order and recurring investments are completely free of charge. Since we tend to invest at least 800 to 1000€ each time, a small fee to buy the shares right away doesn't really make much of a difference for my wife and I. However, if you're only investing smaller amounts like 50 to 100€ on a regular basis, it can make a lot of sense to buy your ETF shares via a commission-free recurring investment using a broker like Trade Republic or Scalable Capital in case you have access to either of them in your country. In fact, we have a smaller recurring investment for our 14-month-old daughter running on Trade Republic for that reason. This brings me to the last lesson I want to share with you. Lesson number 6. Keep an emergency fund. We're all affected by recency bias. Recently, a friend sent me the following message. Hey Angelo, do you keep anything in cash, for example on Trade Republic because of the 4% per year they're paying in interest? I'm wondering if I should just invest everything in stocks and ETFs instead. It shouldn't matter if I'm diversifying enough, right? Basically, what he was implying is that since the expected return of low-cost, well-diversified ETFs is higher, at a long-term historical average of 7% per year, he should just invest everything instead. And since he's diversified, he could always sell some shares if needed for an emergency. Well, here's the thing. He would never have sent me a message like this in 2022 when the market was down 13%. But since he just experienced a year with juicy returns of 17.8% in 2023, he was clearly feeling super bullish about investing and ready to throw caution out the window under the assumption that we're only moving in one direction, which is up. Please don't make this mistake. I obviously told him that's a bad idea. In my opinion, everyone should have an emergency fund. And since emergencies somehow always tend to happen at the worst possible time all at once, your emergency fund should not be invested in risk assets like stocks or ETFs, which could be down in value exactly when you need the money. My wife and I like to keep at least 6 months of living expenses in cash on Trade Republic, which is paying 4% interest per year, secured by a €100,000 bank deposit guarantee. Meanwhile, you may consider 1 to 3 months in reserves to be enough, perhaps if you have a strong safety net in the form of unemployment pay if you were to suddenly lose your job, for example. But since I'm self-employed, that doesn't apply to me, and we're now responsible for our daughter as well, so we feel more comfortable having 6 months in expenses set aside. Ultimately, you need to decide how much you want to keep in your own emergency fund. But in my opinion, everyone should have one, even just for peace of mind. Alright, let's do a quick recap of the biggest lessons I learned over the past 7 years of investing in ETFs, some of them the hard way. First, keep it simple and don't overcomplicate your portfolio. Second, it never feels like the right time to invest, that's not going to change. Third, dividends are irrelevant except psychologically, and the total return is what matters most. Fourth, be patient with your investments and don't move to whatever is moving faster at any given time, something you're likely to regret. Fifth, fees are important to a certain extent, but don't waste valuable time trying to save pennies. And lastly, sixth, keep an emergency fund not only for actual financial emergencies, but also for peace of mind. Alright, that's everything I wanted to share with you today. I hope you learned something useful that helps you on your own investment journey. Before you take off, don't forget to gently tap the like button if you enjoyed the video, and to subscribe if you haven't yet. You can find the best low-cost brokers for ETFs I mentioned in the description below, which is a great way to support me if you'd like to. Thank you so much for watching, have a wonderful day, and until next time.