The power of index ETF
Investing in broad-cap ETFs (aka broad-cap ETFs) requires minimal effort and can double your assets in 6 to 7 years. Because of laziness, the desire for quick wealth, and the wish for something for nothing (of course, investors won’t admit to belonging to any of these three categories), most investors should choose to invest in broad-cap ETFs rather than picking their own stocks.
The Origin of This Post
A few days ago, I received a letter from Mr. Wu, a reader of my latest book, “Investors’ Beautiful Heaven“. Mr. Wu’s letter mainly concerned how ordinary investors can participate in the stock market and share in the asset appreciation it brings, but he was unable to adopt an active stock-picking investment approach due to various reasons.
I was deeply moved by Mr. Wu’s letter, and in recent media interviews, hosts and staff almost always asked similar questions. Although I have discussed related topics in this blog and book before, this prompted me to write this article.
Leave stock market if despise index ETFs
In my three published books and on my blog, I have repeatedly used statistical data to show that the annualized return of the US stock market index or the Taiwan stock market index is the same: approximately 8% excluding dividends and approximately 10% including dividends. However, many investors’ immediate response is always: an annualized return of about 8% excluding dividends and about 10% including dividends is too low; it would take 6 to 7 years to double their assets.
Unless you can prove that you have a history of successfully selecting stocks by yourself and achieving an annualized return of over 15% for more than ten consecutive years, I advise investors with this mindset not to invest in the stock market. You are not suited for the stock market—you will inevitably suffer a major setback and deeply regret your decision.
The desire to get rich quickly is dangerous!
In all three of my books, I mention a morning in 2000 when Jeff Bezos called Warren Buffett and asked, “Your investment system is so simple, why are you the second richest person in the world? Don’t others do the same thing as you?” Buffett replied, “Because nobody wants to get rich slowly.” Most people still believe that the stock market is a place to make quick money and want to get rich overnight.
In the book The Tao of Charlie, Munger said: “The desire to get rich fast is pretty dangerous.”
Most investors should’t do active investing
There are three main reasons why the vast majority of people should not participate in the stock market through active investing, meaning that most investors are not suited to self-selecting stocks:
- Stock market investing is a highly specialized activity; the stock market is extremely complex, and people don’t understand it. Most people buy stocks simply to make quick money, without any real understanding of how investing or the stock market works, because they don’t want to know—which inevitably leads to unsuccessful investing.
- Only a very small number of people are personality-suited to the stock market and will succeed; and personality is ultimately the most important factor determining your success.
- Most people are unwilling or unable to dedicate more time each day than an eight-hour workday to researching fundamental investment work.
Unless you are willing to dedicate the same amount of time as a regular job to active investing, have a strong grasp of a particular industry in your area of expertise, and have a suitable personality; if all three conditions are met simultaneously, I personally believe that the odds of success with individual stock investing are relatively high.
Most people should invest in index ETFs
I Personally, I recommend that general investors buy broad market index ETFs, preferably through regular fixed-amount investments, regardless of market conditions. The best choice is VOO or IVV, which track the S&P 500 index, as mentioned in my book, followed by 0050. Since investors may have other reasons for not wanting to invest in US stocks, investing in 0050 is also feasible for Taiwanese stock investors (after all, it’s a constituent of the Taiwanese stock market, uses Taiwanese dollars, which is more convenient and acceptable to most people).
If you pay close attention, over the past thirty years, the annualized return of buying US broad market index ETFs (VOO or IVV) or the Taiwan broad market index (0050) has been the same: approximately 8% excluding dividends and approximately 10% including dividends.
However, if you decide that you can accept US broad market index ETFs, remember to buy VOO or IVV, not Yuanta Securities (00646). Although it also tracks the S&P 500 index, its fees are “significantly” higher than VOO or IVV.
Investment gurus Possess 2 Great Aspects
As I emphasized in the book, the greatness of the “very few” investment masters recognized by the world stems from two remarkable achievements: First, their performance “almost” beats the market every year; note the word “almost.” The other difficult aspect is maintaining positive returns every year, which is also challenging. Even Buffett cannot consistently beat the market and maintain positive performance year after year.
Market Indices Have Two Major Advantages
Most people underestimate the wealth-generating power of market index ETFs and overlook their achievements. Beating the market is indeed very difficult—market index ETFs excel in both of these aspects. Why are the top investment masters listed in my book so revered? I personally believe they all share a common trait: they excel in both of these areas. In other words, if you excel in these two areas, it’s difficult not to become wealthy.
Investing in broad market index ETFs at least guarantees investors a winning position in the first of these two challenges: the S&P 500 rarely experiences losses, thus ensuring strong performance in the second.
But which investor can consistently outperform the S&P 500 in both aspects over the long term (more than 15 years)?
Investment success requires sustainability
The most common argument I hear against long-term investing, or that dismisses broad market investors, is: “Look how much I earned last year and the year before! You can’t do that with broad market investing. I don’t even need to invest in broad market indices to achieve this.” I also often see online celebrities claiming their five- or ten-year returns exceed Buffett’s. “The annualized return of the broad market index is only 10% per year, far worse than mine!”
These arrogant, ignorant, and narrow-minded people should wait until they produce a track record of over ten consecutive years (twenty years or more would be even better) with an annualized investment return of over 15%, and their investment portfolio is large enough before they start spouting nonsense. Look at Warren Buffett, who has achieved an annualized investment return of 19.9% for over 60 consecutive years, and his investment portfolio is worth hundreds of billions of dollars!
Most people forget: which of the very few investment masters revered by the world has ever discussed annualized returns over less than 15 or 20 years? Annualized returns of less than ten years have very little reference value, and those below five years are practically meaningless. The reason is simple: most people who achieve exceptionally high annualized returns in the short term are invariably propelled by bull markets, not by individual achievements.
Have we forgotten that the S&P 500’s total return was negative from 2001 to 2010? Did the dot-com bubble take the Nasdaq a full 15 years to return to its pre-bubble levels?
Boredom is Good
Some people, especially young people, find it hard to accept broad market ETFs, thinking the returns are too low and uninteresting, which is a real shame. Investing in broad market ETFs may not show results in one or two years, but if you persist for more than five years, you will definitely see significant results. This is my own belief based on thirty years of experience.
Closing words
As Warren Buffett said, “The first rule of investing is not to lose money. The second rule is not to forget the first rule. That’s all there is to it.” When investors eliminate any possibility of losing money, they have achieved certainty in their investments, and ultimately, making money through investing will not be too difficult.
In a 2025 interview with the founder of Xueqiu, Duan Yongping said: “I can tell everyone a way to make money. You just buy the S&P 500 index, and you will always make money in the end, but that doesn’t mean you understand it. However, if you actually do it, it means you understand it.”
Facts need no refutation
Of course I know most people disagree with the views expressed in this post, and I don’t care at all whether you agree or not, nor do I need your consent. I’m stating the facts, and the fact that most people disagree doesn’t change the fact that it is a fact!
If you are a young investor, you will agree in ten years. Even if you still disagree in ten years, you will definitely agree after you retire.
Related articles
- “Best 10 years returned industry-specific ETFs“
- “The power of index ETFs underestimated“
- “A table comparing S&P 500, Nasdaq, Dow Jones, Philadelphia Semiconductor Index over the years since its inception and annualized returns“
- “Investors should care annualized rate of return (IRR), How to calculate?“
- “Most investors should invest ETFs tracking broader market“
- “US issued ETFs tracking US market is your best bet“
- “Top 10 ETFs and important major US stock market index“
- “Consequences of Index Fund and ETF Regulations and Restrictions“
- “Stocks Better than the S&P 500, Procter & Gamble (P&G) “
- “Investors turn to passive investment funds ETF and abandoning active investment funds“
- “Global stock markets performance comparision over the past 30 years in a table“
- “S&P 500 vs. Nasdaq 100 index, how to choose a market index?“
- “S&P 500 index next year performance, based on last century record“
- “Return rate comparison among Buffett portfolio, Berkshire stock price, S&P 500 over the years“
- “2022 S&P 500 Constitutent Stocks Performance“
- “Stocks Better than the S&P 500, Procter & Gamble (P&G)
- “S&P 500 vs. Nasdaq 100 index, how to choose a market index?“
- “S&P 500 index, the only stock worth holding forever“
- “Querier to Annualized rate of return for S&P 500 Index“
- “Querier to Annualized rate of return for Dow Jones Industrial Average (DJIA) Index“
- “Querier to Annualized rate of return for Nasdaq Index“
- “S&P 500 P/E ratio has been rising in the past century, S&P 500 PE Ratio and Average Querier“
- “Querier to Annualized rate of return for Philadelphia Semiconductor Index (SOX)“
- “Querier to Annualized rate of return for Taiwan Stock Exchange“
- “How does BlackRock, the world’s largest index and asset management company, make money?”
Disclaimer
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.
