In Part 1 of this series, I talked about basing investing decisions on what I feel is most likely to persist in the future. This is another “big picture” post.
We invest our money because we want to do something besides just sit there. We want it to grow while we’re also busy working. The most basic way of doing that is to either start a business, or buy shares of another business. Some businesses will fail, some will do great, and it can be risky to bet on which one will do what. But as a whole, it is a pretty safe call to say that profits will be generated and value will be created. In the long run, you will end up with these profits. Therefore, one way to invest is simply to buy all the companies. And if you buy them in proportion to how much they are valued, then you end up with a good representation of the entire “market”.
This idea has been promoted by many financial experts. Jack Bogle offers a good explanation is his book The Little Book of Common Sense Investing. This excellent article on investing in total markets lists many others.
It may seem a bit crude at first (kind of like using a shotgun), but in fact it’s actually quite an elegant idea. You let the individual companies fight it out, and you just sit back and enjoy. For example, let’s say there is a growing desire for alternative fuels. Well, many companies are bound to pop up try and profit from that. Some will be wildly successful, some will fail. Maybe such energy companies become a huge part of the economy – well, if you bought total stock market fund you’d own all those winners. To paraphrase author Burton Malkiel – “My advice is that rather than futilely attempting to find the needle in the haystack, buy the haystack”.
This can be implemented on a country level, or even on a world level. The Vanguard Total Stock Market ETF (VTI) tracks the total US market via the Wilshire 5000 index and includes over 3,600 stocks. The Vanguard FTSE All-World ex-US ETF (VEU) tracks the entire world’s publicly traded companies, minus that of the US, and holds over 1,500 representative stocks from 47 countries. Since by the market capitalization of the world is currently split up about 45% Non-US/55% US, if you buy 3 shares of VEU for each share of VTI, and you’d be tracking the performance of virtually all of the world’s liquid companies.
I like this as a portfolio idea, but there are some other theories to consider as well…
Read more: Index of Posts On Building My Portfolio
By Jonathan Ping | Investing | 10/30/07, 4:25am