Best Index Funds for Global Stocks, Part I
Part I - Strategy
(Part II - Setup
Part III -Operations)
Background
Strategy
Tilts
Modern Portfolio Theory
Strategic allocation rules
“Core and satellite” portfolio design
Screen for compliant ETFs
Summary
Background
Without enough knowledge or time to make a sound call, some investors nonetheless try to pin the tail of a stock they hope will outperform, on the donkey of all stocks in the market. The alternative is to find one fund for exposure to all global equities. Why only one fund? Why global? Companies, sectors and country markets go up and down but we do not have the knowledge or time to understand this and we cannot predict the future. So we diversify as broadly as possible to protect our capital and the good investments will cancel out the bad and hopefully we can benefit from rising markets wherever they occur.
Passive investing is a strategy for minimising stock dealings with all its risks and costs. It is a cheaper way to hold a bunch of stocks that represent the overall market. It is a way to build wealth gradually but surely. All the information is already in the market, in the form of the price, so there is no benefit in trying to time the market or identify which stocks will outperform. But we believe that over time, in the long run, markets will rise and because we do not know when or where, it is better to be “in” than ”out”.
Rather than trading securities, we buy an index to the target market. An index is like a ruler that measures overall market activity. The index is normally worked out by taking the average price of the basket of securities, as they move up and down each day, but weighting by the market-capitalisation of each company (“market cap.” is number of shares times the share price).
A way was found to buy and sell the index and it is called an Exchange Traded Fund or ETF for short. Today, indexes, in the form of ETFs, can be bought and sold like stocks and shares.
Strategy
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