Investing in shares is essential for the investor who wants to take advantage of the economy’s dynamics to increase the value of his capital.
The alternative to investing in shares is real estate. Real estate and shares are the two assets whose long-term performance follows the economic dynamics:
Equities will benefit from the ability of companies to adapt to always seek to make more profit in the long term;
Real estate will naturally benefit from the increase in the purchasing power of citizens (and therefore from the fruits of economic growth), but also from the monetary consequences of growth such as inflation. Investing in real estate is investing in a stock of raw materials and labor whose price tends to increase over time with inflation.
Let’s focus here on the topic of the day, which is investing in stocks. Investing in shares means taking a long-term stake in the capital of a company in order to benefit from the increase in the latter’s profitability.
Attention, it is important not to confuse :
Investing in shares, which means taking a long-term stake in the capital of a company; Investing in shares, which means believing in the long-term value of the company.
Speculating on the stock market, i.e. playing to predict the short-term evolution of the stock price. Speculating on the stock market is betting on the evolution of the stock price (and sometimes independently of the value of the companies).
Speculation does not work. It is a trader’s trick, a casino player’s trick endowed with the powers of mathematics that give him the illusion of dominating chance, but in which the long-term saver loses in advance because the individual is a dwarf in the world of professional speculators.
The saver must be a long-term investor, i.e. take stakes in companies that he will accompany for 5, 10 or even 20 years. The long time is the ally of the saver.
The main question is then the capacity to select these companies in which to invest.
How to invest in the capital of companies over the long term?
The most daring, those of us who “like” to know the companies in which they invest, will be keen to choose the 20 or 25 companies that they consider capable of creating value over the very long term. This is not the most rational strategy, but it is the heart that speaks.
The others, i.e. those of you who are convinced that investing in the capital of companies is of great relevance, but who know nothing about it (and especially do not want to take the risk of claiming to know about it), will have no other choice than to choose an intermediary capable of selecting these companies for them.
To do this, the investor can invest in shares via FCP (Fonds Commun de Placement). This means entrusting your savings to a professional who will select the companies in which to invest on your behalf.
There is a multitude of FCP, even much more than listed shares. All these professionals sometimes sell dearly their expertise and their ability to select the best companies. They are all excellent salesmen.
Yet, in reality, the results are not up to par. In the latest SPIVA study, we learn (once again) that few portfolio managers actually outperform their benchmark.
For example, 92.86% of mutual funds investing in large CAC40 companies do not manage to generate an overall performance (including dividends) higher than the CAC40 with dividends reinvested.
ETFs are the perfect tool for investing in the equity markets without taking the risk of selecting the wrong portfolio manager.
Thus, the investor will have to go through an obstacle course to be able to identify the portfolio managers capable of outperforming their benchmark.
In a life insurance contract, there are sometimes more than 600 UCITS. Who can claim to be able to find the few that will be able to perform at least as well as their benchmark?
I am not capable of doing so.
I know the ones that have been the best over the last 10 years, but unfortunately, they are very rarely the ones that will be the best over the next 10 years. It would be too easy (the H2O investors learned this the hard way).
In short, the investor who wants to invest in the equity market is unable to select the right funds. It is seriously impossible.
This is when the ETF appears as a simple and efficient solution.
By choosing an ETF, you will not choose the fund that will succeed in generating a performance higher than its benchmark (in any case, we have just explained that this is impossible), but, and this is already a lot, you will avoid selecting a fund that will post performances lower than its benchmark.
The performance objective of an ETF is simple: It is to replicate an index. No more, no less.
The ETF allows you to be sure not to make a mistake in your selection of mutual funds or other units of account in life insurance or PER.
It’s not a revolution, but it’s already huge.
But beware of shortcuts. It is not a question of explaining to you that by choosing an ETF to invest in shares you will win at all times! That would be a lie because if investing in ETFs allows you to avoid making mistakes by selecting the wrong mutual funds or the wrong stocks, investing in ETFs at the wrong time will not allow you to make a good investment.
We will work tomorrow on “the right time” to invest in the stock market.