• YouTube personality Graham Stephan sees investing in index funds as the best way to build long-term wealth
• ETF savings plan offers a number of advantages over investing in individual stocks or actively managed funds
• Attractive return opportunities, especially in the long term
Expert on private finance recommends regular investment in index funds
“The best way to create long-term wealth is to invest in an index fund,” The Ascent quotes Graham Stephan, who owns one of the largest personal finance YouTube channels. “It’s boring, but you’ll beat almost anyone who tries something different.”
Exchange-traded index funds, also known as Exchange Traded Funds (ETFs), track a stock index, such as the leading German index DAX or the market-wide US index S&P 500. If the index rises, so does the value of the index fund. Since the indices contain different stocks – and depending on the index, stocks from different sectors and countries – investors benefit from broader diversification and lower risk when buying an index fund than if they invest their money in the shares of a single company.
The dollar cost averaging that Stephan recommends means that investors can build up an investment position by making regular equal-sized investments in an index fund and thereby benefit from the cost averaging effect. Investors don’t have to constantly follow market developments and look for the perfect time to invest, but receive sometimes more or sometimes fewer shares for their fixed amount of money, depending on the price of the index fund.
Another benefit of a stock ETF is that since it passively tracks an index and the stocks it contains are fixed because of the underlying index, it doesn’t need to be actively managed. As a result, stock index funds typically have lower fees, which can save investors money.
Development so far promising
Equity funds can offer attractive return opportunities, especially in the long term, and are therefore suitable for private pension provision and long-term asset accumulation – this is shown by the development of many indices to date. According to The Ascent, for example, the S&P 500 has a long track record: For decades, the market-wide US index has achieved an average annual return of ten percent over the long term.
As the Deutsches Aktieninstitut (DAI) writes, the DAX yield triangle also shows “that diversified and long-term saving in shares over the past 50 years has paid off.” According to the DAI, investors who have saved a fixed monthly amount in DAX shares with an investment horizon of 20 years can achieve an average annual return of 8.5 percent on the invested money. In the worst case, the annual return was 4.7 percent, in the best case 16.1 percent (as of December 2022).
Investors who invest with a long-term orientation do not have to worry about interim price fluctuations.
Nevertheless, the Deutsches Aktieninstitut recommends investors not to invest exclusively in shares, but also to have other liquid funds at their disposal at all times in order to be able to sit out possible lows and not to be in a position to have to sell investments at an unfavorable time.
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