Investing expert: How ‘the smartest people in finance’ build wealth – CNBC
If you follow financial figures on social media, chances are you’re getting inundated with new ideas every day. Whether it’s buying stocks, “HODLing” cryptocurrency or trading options, there’s always seemingly a new way to get richer faster.
While some people do manage to get rich quick through trading, for most, building wealth is a long-term game. And when your goal is decades away, the best advice tends to be boring. In fact, it may boil down to doing one simple thing.
“The smartest people in finance do one thing: they buy a basket of stocks (ETFs, MFs) that’s low fees, and they don’t look at it again,” marketing professor, podcaster, author and all-around financial influencer Scott Galloway wrote in a recent tweet.
Eric Balchunas, a senior exchange-traded fund analyst at Bloomberg, expressed a similar sentiment. “If your goal is to stick it to the billionaire Wall St ppl/apparatus then just buy and hold a cheap index fund. That’s only way to do it. And you’ll get wealthy in process, a two-fer,” he wrote on Twitter.
Rather than toiling away in the market’s daily nitty gritty, long-term investors are better off buying diversified investments on the cheap and hanging onto them over the long term, financial experts say. Here’s why.
Why diversification helps you as an investor
Buying a broad basket of investments ensures that you’re not taking too big a bet on any one in particular.
“It all goes back to the whole idea of not putting your eggs in one basket,” says Amy Arnott, a portfolio strategist at Morningstar. “By diversifying, that can help you avoid being overexposed to any one particular area of the market when it’s out of favor.”
This is where mutual funds and exchange-traded funds come in. These baskets of stocks are designed to give you exposure to a wide swath of the market. Funds branded as “total stock” funds generally hold a representative sample of the entire U.S. stock market, while “total bond” funds do the same for bonds.
Holding large mixes of stocks and bonds has historically been a good play — one that has relied on the upward trajectory of broad U.S. markets.
A portfolio of 80% stocks and 20% bonds, with each component represented by broad market indexes, earned an annual return of 9.6% from 1926 through 2019, according to calculations by Vanguard.
Low-fee mutual funds and ETFs: ‘You get what you don’t pay for’
If you agree with the experts that you’re better off buying diversified funds than individual investments, the question then becomes, which fund do you choose? All things …….