How professionals invest and how you can do better

Investing is easy and for everyone

In a world of inflation and constantly changing markets, investing has become a necessity, not just an option. The need to secure a stable financial future is driving more and more people to explore stock market investments.

In this article I will talk about how professionals invest and how you can do the same but in a simpler and better way.

Article summary

Financial planning should be adapted to each individual's stage of life.
The stock market is historically the most profitable asset in the long term.
Active management can offer advantages over passive investing in certain contexts.
Value investing is based on buying undervalued assets.
ETFs are the safest and simplest option to start investing in the stock market.

The importance of financial planning

Financial planning is a crucial aspect that many people overlook. All investments should be tailored to one's stage of life and personal circumstances. It's essential for people to understand that every asset has a time horizon and that they must adapt their investment strategy to their specific situation.

Young people (20-30 years old): They have the opportunity to start planning their financial future with an advantage that many previous generations did not have.
Adults (30-50 years): They should focus on building a solid wealth, considering the stock market as a key asset.
Older adults (50 years and over): They need to think about a portfolio that allows them to generate passive income.

Why invest in the stock market?

The stock market has proven to be the most profitable asset in the long term, with a historical return of between 6% and 10% per year.

The truth is that despite the popularity of assets like Bitcoin or gold, the stock market (stocks) offers a more consistent and predictable return.

Below are some reasons why the stock market is one of the best options for long-term investment:

Historical Performance: The stock market has outperformed other assets in terms of long-term profitability.
Liquidity: It is easy to buy and sell shares, allowing investors to access their capital quickly.
Company Growth: By investing in stocks, investors benefit from the growth of companies and their ability to generate profits.

Now that you know why you should invest in the stock market, let me tell you how professionals invest.

Active vs. passive management

A recurring theme in investing is the comparison between active and passive management. The truth is that both approaches offer particular advantages.

Active management allows you to select stocks with the potential to outperform the market (you can do it yourself or through a manager), while passive management seeks to replicate an index with lower costs and less intervention.

The truth is that if done well, active management usually yields greater benefits, but to do it well you must have educated yourself beforehand.

Active Management: Allows investors to take advantage of market inefficiencies and select undervalued stocks.
Passive Management: Ideal for those who prefer a simpler and less expensive investment strategy.

People who actively manage their portfolios usually opt for an investment system called value investing.

What is value investing?

Value investing is based on the premise that the market doesn't always accurately value stocks. Investors look for opportunities where the stock price is below its intrinsic value, indicating significant growth potential.

In other words, the goal of value investing is to buy companies that are currently undervalued. Of course, this isn't easy, and the truth is that companies are rarely truly undervalued, and this often goes unnoticed by the market.

Professional fund managers, however, favor this type of investment because they believe in, or trust, their analytical skills. In fact, there are many stock market courses offered to teach value investing (I have reviewed several of these courses, as you can see here).

Someone who does value investing and whom you probably know is Warren Buffett.

Warren Buffett is one of the most successful and recognized investors in the world, known as the "Oracle of Omaha" for his ability to generate consistent and exceptional returns.

Buffett is a benchmark in the world of investment, and has accumulated a significant fortune by following the principles that govern value investing.

The truth is that what Warren Buffett is no secret and you can learn from a good book.

If you're interested in learning more about this type of investment, I recommend you read:

Benjamin Graham's The Intelligent Investor: Considered the "bible" of value investing, it offers key principles on value investing, teaching how to identify undervalued companies and manage risk. Warren Buffett has highly recommended it (you can read a summary of this book here).
Warren Buffett and the Interpretation of Financial Statements by Mary Buffett and David Clark: This book explains how Buffett assesses a company's financial health to make investment decisions.

What you should know about value investing

Unfortunately, it's not as simple as Warren's fans suggest. The truth is that the vast majority of professional fund managers rarely manage to beat the returns achievable through passive management.

The main reason why many fund managers fail to outperform the S&P 500 index is the cost associated with active management, such as fees and charges, which reduce overall returns.

Furthermore, on average, fund managers struggle to consistently identify winning stocks that outperform the overall market. Notable examples include funds such as those managed by Fidelity and T. Rowe Price, which have underperformed the S&P 500 for many years, underscoring the challenge of consistently beating the market.

Passive management and ETFs

The truth is that active management can be worthwhile if you know how to do it. Unfortunately, not everyone knows how, and as we said, if you add commissions and associated fees, there's not much left.

Keep in mind that I'm talking about long-term investing, not trading. Trading is something else entirely.

I trade, and I also invest long-term. But when it comes to long-term investing, I don't use a fund manager; I prefer passive management, and the easiest way to do this is by tracking an index.

What is a stock market index?

A stock market index is a tool that measures the average performance of a group of representative stocks in a specific market. A well-known index is the S&P 500, which includes the 500 largest companies in the USA.

Examples of important indices:

S&P 500: Groups the 500 largest companies in the United States.
Dow Jones Industrial Average: Compiles 30 key industrial companies in the United States.
NASDAQ 100: Focuses on 100 large companies, mainly technology companies.

'Beating the index' means that a fund or manager achieves a higher return than the benchmark index (generally the S&P 500) over a given period.

As I said before, this is a difficult goal to achieve for professionals who actively manage, since the indices reflect the overall market, and surpassing it requires precise and consistent selection of winning stocks (without adding commissions).

The smart investor option

Investing in ETFs is one of the simplest ways to invest long-term. This financial vehicle has gained immense popularity in recent years and is the ideal option for beginners.

What are ETFs?

ETFs , or exchange-traded funds, are investment instruments that replicate the behavior of an index.

They are characterized by combining the advantages of stocks and investment funds, offering liquidity and diversification. Through an ETF, an investor can access a diversified portfolio of assets, such as stocks or bonds, without needing to buy each one individually.

Advantages of investing in ETFs

Diversification: An ETF can include thousands of assets, which helps mitigate risk. For example, an ETF that tracks the MSCI World Index can include more than 1,500 stocks from different sectors and regions.
Liquidity: Unlike investment funds, which can only be bought or sold at the end of the day, ETFs can be traded at any time during the trading day.
Low Costs: ETF management fees are generally lower than those of traditional investment funds, allowing investors to maximize their returns.
Accessibility: With the introduction of fractional buying, investors can purchase shares of an ETF for as little as 10 euros, making it easier for those with less capital to invest.
Simplicity: ETFs are easy to understand and trade, making them an attractive option for new investors.

ETF investment strategies

1. Long-term investment

One of the most common strategies is long-term investing, where investors buy and hold ETFs that track indices like the S&P 500. This strategy allows investors to benefit from compound interest and appreciation over time.

2. Tactical Investment

Another strategy is tactical investing in specific sectors or megatrends, such as clean energy or cybersecurity. This allows investors to capitalize on opportunities in sectors expected to grow rapidly.

3. Investment in fixed income

Fixed-income ETFs are a lesser-known but equally valuable option. They allow investors to access a diversified portfolio of bonds, reducing the risk associated with investing in a single bond.

ETFs work the same way as stocks.

Investing easily with ETFs

The truth is, investing in ETFs is incredibly easy. You open an account with a broker and buy an ETF in just two clicks.

Do you think the American economy will thrive in the coming years? Then there's nothing better than investing in an index of its largest companies: the S&P 500.To do so, simply put your money into an ETF that tracks the movement of this index.

Do you like tech companies like Google, Apple, Microsoft, etc.? Then you can choose an ETF that groups these companies, such as the Nasdaq 100, which includes the leading US tech companies.

The truth is, ETFs cover almost every sector of the economy. This way, you don't have to meticulously select companies you think will grow over time. You don't have to complicate things with debt analysis, cash flow, EBITDA, etc.

The truth is, if you're investing for the long term, there's no point in taking a value investing course (unless you're really passionate about it) just to pick the winning horse for the next 10 years. Instead, bet on all the horses (you can do this by investing in an S&P 500 ETF, since you know this ETF will track the index's movement).

The difficult part when starting to invest is weathering the bear markets. Novices struggle to cope with these periods because they've worked hard to earn their money, and every time the market falls, they get very nervous, thinking they'll lose everything. Nothing could be further from the truth. Logically, the economy will improve over time (at least that's what the strength of the US economy has shown in recent decades).

However, to minimize this risk, the usual approach is to make recurring contributions. In other words, you don't invest all your savings in an ETF and forget about it; instead, you instruct your broker to invest small amounts each month.

This way, if you start investing right when the markets are falling, you'll barely feel the impact, and month by month you'll accumulate for your future.

My favorite broker to start investing in ETFs

The XTB Group offers the best tools to start investing in ETFs. I recommend you visit their website and see for yourself how easy it is to create an investment plan.

Conclusion

I hope I've been clear in this long article. My intention is to show you that you can start investing very efficiently with little money, and that you can do so without needing the services of a professional manager or an investment course.

Investing in ETFs is an excellent way to diversify and manage risk in an investment portfolio.

With their many advantages, such as liquidity, low costs and accessibility, ETFs are becoming an increasingly popular option among investors.

Whether through a long-term strategy or more targeted tactics, ETFs offer opportunities for all types of investors. Start today; your future self will thank you.

Norberto Viale( Trader and founder of Experiencia Topstep )

My name is Norberto. I've been investing and trading for over a decade. I'm also the author of the trading course Experiencia Topstep. If you want to learn how to invest and have any questions, feel free to contact me.