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Long-term investing using ETFs

Actively planning to grow your wealth over time can help you establish a peace of mind regarding your own future.

One of the cheapest and robust ways to do so this is to invest into a mix of Exchange-Traded Funds (ETFs).

Long-term ETF investing can benefit your trading

If you are a new trader, then you are likely to be experimenting with different techniques and possibly losing small amounts of money. Engaging in trading and long-term investing at the same time can be a way of making more money over the long-term, than you are losing whilst learning in the short term.

There are also psychological benefits to investing alongside trading, because the pressure of making money with trading is lifted with the knowledge that you are making money with long-term investments. It means that you are able to take a small amount of capital for both your long-term investment for, say, retirement, and a separate amount of money for trading. You can keep these two sets of monies separate, and so if you lose on your trading account, this will not affect your long-term wealth growth.

Without the added pressure of having to make money long term with trading, it is easier to learn trading with real money.

Achieving long-term wealth with ETFs

ETFs are investment funds traded on stock exchanges. An ETF holds assets such as stocks or bonds and its price trades very close to its net asset value over the course of the trading day. They are attractive as investments because of their low costs and the ability to buy and sell them on the stock market, making them the most popular type of exchange-traded product.

In contrast to actively managed funds you do not have to pay an initial fee, nor an annual management fee. The effective yearly cost of most ETFs is less than 0.1%. At the same time, they offer great benefits such as diversified access to an entire index or segment. An ETF might e.g. replicate the performance of over 3,000 different stocks.

Why you should diversify through multiple ETFs

While an ETF is diversified in itself, you should not put all of your capital into one single ETF such as a US Stocks ETF. You should also invest some of your pension money into bonds and diversify across regions.

Depending on your risk tolerance, you put more or less of your capital into the various segments. Stocks and real estate are historically more volatile, but offer higher returns, while dividend stocks, bonds and Treasury Inflation-Protected Securities (TIPS) help reduce volatility, but present lower yields.

Regionally, U.S. stocks and bonds have historically higher returns than European and mature Asian ones and lower returns than emerging markets which in turn have the highest volatility. The best long-term return is expected by diversifying across these regions.

The following table presents the leading ETFs, according to criteria of liquidity and cost.