Three Common Beginner Questions
I got these questions from someone on Blossom. Felt I should write a post since they come up frequently. Answers can be found on my cheatsheet in my profile (go read it!) but it can also be more helpful to answer questions directly.
Key note: A lot of this requires understanding the concepts behind a passive investing style. Answers would be different for those with a different philosophical approach.
1. In this period of time do you think investing in XEQT isn't the best since the markets are already high?
I think as a beginner one needs to ask themselves what does "high" mean? Relative to what? Does all-time high matter if you're investing in something that constantly trends upwards and is expected to keep making all-time highs in the future?
A lot of times beginners fear buying at the high, but when it comes to an index approach, does it really mean anything?
You can dive into the data or read papers such as PWL's Buy the Dip that show why you hear the "don't time the market" advice. This paper shows that buying at all-time highs still beats on average someone waiting for dips with cash on the side.
For a diversified strategy, the shortcut is that investing at any time should bring positive expected return. This has to do with how the markets work. This is where more reading is needed. There are buyers and sellers that form current prices, so while something might "feel" high, it doesn't necessarily tell you what that means for future returns.
2. What's your prediction for the future?
The beauty of a broad, diversified style is that you don't need to make predictions. You're trying to just grab the positive return of the market (otherwise known as the market premium). The best returns are driven by a small subset of stocks, so by casting a wide net, you increase your odds of having exposure to those stocks, and in return your overall return benefits.
3. What's the best advice you can give to a young man that wants to invest long term in ETFs or stocks?
I'd say to educate yourself on concepts like market efficiency that explain the reasons behind why many investors choose this style. Read up on and question the underlying theory.
The theory hasn't changed for decades, which is why I'm able to hold without checking my portfolio.
But if you want to venture out and pick stocks, that's its own journey.
