Many ETF investors give away returns every year. Experts explain which mistakes can be avoided and how investors can build more wealth in the long term using a simple strategy.
• Researchers show: Many investors make similar mistakes with ETFs
• Timing, ETF selection and reallocations influence investment success
• Clever investment strategy pays off in the long term
ETFs have long become the most popular investment instrument for many private investors: they are inexpensive, transparent and enable broad diversification. But despite the advantages, many ETF investors continue to make similar mistakes, sometimes with serious consequences for long-term returns.
A 2016 European Finance Review study by Bhattacharya and colleagues shows that investors earn an average of 1.69 percent less net return per year when they make poor investment decisions. What initially sounds like little could add up to a six-figure sum over decades.
The biggest mistake many private investors make is choosing their ETFs. Instead of relying on broad products like the MSCI World, they prefer trend or niche ETFs, such as individual sectors or topics such as artificial intelligence. According to data from the German broker examined in the study, this incorrect ETF selection accounted for 1.28 percent of the annual underperformance. On average, such products perform worse than a globally diversified index fund.
Bhattacharya and his colleagues emphasize this again in the study: “There is also an opportunity loss, which primarily results from not selecting low-cost and well-diversified ETFs.”
2. Market timing: Buy expensive – sell cheap
The second biggest killer of returns is trying to get the perfect market timing. Investors are frantically shifting their money from one country or sector to the next. They often succumb to the classic mistake: they buy high and sell low.
This error cost investors in the study an average return of 0.41 percent per year. The researchers therefore come to the clear conclusion “that the average investor could have benefited from using ETFs if he had followed the guidelines of classical financial theory.”
3. Too much action: Active instead of passive
ETFs are actually intended for passive investing. But many investors use them to actively speculate and make the same mistakes as when trading stocks. “Investors appear to be making the same mistakes when trading ETFs that they made when trading without ETFs,” the researchers said. Too frequent rebalancing not only leads to poorer results, but also to higher transaction costs – a double drain on returns.
That’s how high the price of these mistakes is for investors
A calculation example from justETF shows how big the difference actually is: Anyone who pays 500 euros a month for 30 years into an ETF portfolio that only grows by 4.31 percent annually due to poor decisions (6 percent as the average MSCI World return minus the 1.69 percent that is lost due to incorrect ETF errors) will end up with assets of around 368,000 euros.
With a simple buy-and-hold strategy with a cheap MSCI World ETF that has grown by around six percent annually and has ongoing costs of 0.10 percent, it would be just under 495,000 euros – i.e. 127,000 euros more.
Experts say investment strategy: Simple, cheap, broadly diversified
The experts therefore recommend a clear strategy: Investors should rely on global and broadly diversified ETFs such as the MSCI World instead of being seduced by short-term trends or industry speculation. Anyone who stays true to their buy-and-hold strategy and avoids hectic reallocations increases the likelihood of stable returns. A regular one is particularly effective Savings planwhich invests automatically while reducing transaction costs.
Investment legend Warren Buffett also advises: A low-cost index fund is the best choice for the vast majority of investors. The researchers at the European Finance Review put it even more clearly: “It would have been a smart strategy for the individual investors in our sample to buy and hold well-diversified, low-cost ETFs. Of course, this strategy also saves transaction costs.”
Bettina Schneider / editorial team finanzen.net