After creating your financial plan, it is time to put this financial plan into practice : saving and investing.
Step 1: calculate your net worth
Step 2: create a budget
Step 3: pay off debt (excl. mortgage)
Step 4: create an emergency fund
Step 5: build a financial plan
Step 6: invest and “stay the course”
“Pay yourself first”
Everyone has experienced a time when there was no money left at the end of the month…
When do you save? At the end of the month with the leftover money? Or right after your income comes in?
When you are creating your budget, you make a distribution of your expenses using categories. In your budget, make sure you have a fixed category called “savings”. Here you register the amount that you wish to save each month.
Using the “pay yourself first” technique you literally pay yourself first, and you can prevent yourself from spending all your money. Most banks allow you to set up an automatic savings transfer and here you instruct the bank to automatically transfer an amount to your savings account each month. The best timing for this automatic savings order is just after your income comes in.
Now it’s time to really start investing, exciting right?
You can invest in a variety of ways: real estate, stocks, bonds, peer-to-peer lending, art, and many other investment opportunities.
I’m going to take a closer look at passive investing in this article.
In the long term, you are more likely to get a better return from a passive investment than from an active investment portfolio.
SPIVA U.S. Scorecard (1)
Passive investing
Passive investing is sometimes described as a boring way to invest. When investing passively, you follow an index of stocks and/or bonds. A stock index is the weighted average of several important stocks. Examples are the Belgian BEL20 index, the American S&P500 index and the Dutch AEX index.
On the other hand, you can also actively invest, sometimes called “stock picking”. In this case, you choose which individual stocks (and/or bonds) to invest in. In the long term, you are more likely to get a better return from a passive investment than from an active investment portfolio (1).
ETFs
We use ETFs for passive investing in Belgium. An ETF (Exchange Traded Fund) is an investment fund which is (usually) based on an index. The provider of an ETF, such as Vanguard and Blackrock, buys and sells shares/bonds based on their weight in the index. The big advantage of an ETF are the management costs. The manager can keep these costs very low because there is almost no manual work involved, unlike actively managed funds.
You can trade ETFs on the stock exchange.
How do I select a good ETF? A helpful website for selecting an ETF is www.justetf.com.
I select my ETFs based on the following criteria.
- Globally diversified : the main reason for this is spreading the risks. Suppose you invest in the stock market and buy shares of 1 company. If this company goes bankrupt, you lose the entire value of your investment. But if you invest in 1000 different companies on the stock market, for example using an ETF, when one company goes bankrupt you don’t lose the entire value of your investment. Therefore, it is best to invest on a global scale, regardless of countries and/or sectors.
- Full replication : the provider of an ETF with physical replication purchases stocks or bonds that are part of the index. A first advantage is transparency, you know perfectly what’s in the ETF. Another advantage is security : the ETF provider effectively owns the stocks/bonds and these are the collateral if the provider goes bankrupt.
- Expense Ratio : the provider of an ETF charges shareholders an expense rate to cover the operational costs of the fund. Here, I’m aiming for a maximum annual percentage rate of charge, also called Total Expense Ratio (TER), of up to 0,50%.
- Accumulating : in Belgium we pay 30% withholding tax on dividends. An accumulating ETF reinvests the dividends, and therefore you don’t have to pay this withholding tax.
- Domiciled in Ireland : Ireland does not tax foreign investors on dividends.
- Issued in euro : you buy or sell the ETF in euro and thus avoid exchange rate costs.
- UCITS : the ETF complies with EU regulations to protect the public from unsuitable investment vehicles.
- Fund size : ETFs are only profitable when they have a certain size, if they are not profitable the fund may close its doors. Smaller ETFs typically have a lower trading volume and are therefore generally less liquid. With a fund size of about 100 million, an ETF can be managed cost-effectively (2).
- Not registered in Belgium : Belgians pay a lower tax on stock exchange transactions (TOB) for each purchase and sale of funds that are not registered in Belgium but are registered in a country of the European Union.
Some examples of ETFs that meet these criteria
VWCE : Vanguard FTSE All-World UCITS ETF (USD) Accumulating (3)
This ETF is described as follows : “The FTSE All-World index tracks stocks from developed and emerging countries worldwide.”
This fund invests in developed and emerging market equities and is therefore globally diversified. Replication is physical, and the total expense ratio is 0.22%.
The distribution policy is accumulating, so dividends are reinvested in the fund. The domicile of the fund is Ireland and the ETF is issued in Euro.
This fund complies with UCITS regulation. The fund size is over 2 billion and this is certainly large enough to be profitable and liquid. This fund is not registered in Belgium
AGGH : iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) (4)
This ETF is described as follows : “The Bloomberg Barclays Global Aggregate Bond (EUR Hedged) index tracks bonds issued in emerging and developed markets worldwide. Rating: Investment Grade. Currency hedged to Euro (EUR).”
This fund invests in developed and emerging market bonds and is therefore globally diversified. Replication is physical and the total expense ratio is 0.10%.
The distribution policy is accumulating, so dividends are reinvested in the fund. The domicile of the fund is Ireland and the ETF is issued in Euro.
This fund complies with UCITS regulation. The fund size is over 1 billion and this is certainly large enough to be profitable and liquid. This fund is not registered in Belgium
I advise you to always read the factsheet and KIID (Key Investor Information Document), these contain important information about the fund!
Another important part of “do it yourself” investing is selecting a good (online) broker. I will explain this further in the blog post Select a good broker.
This info is for informational, educational and entertainment purposes only, and does not constitute financial, accounting, or legal advice. Please do your own research (disclaimer).
Sources :
(1) S&P Dow Jones Indexes. (2021, 11 maart). SPIVA U.S. Scorecard Year End 2020. www.spglobal.com. https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2020.pdf
(2) JustETF. (2021, 17 maart). Size matters when it comes to ETFs. https://www.justetf.com/uk/news/etf/size-matters-when-it-comes-to-etfs.html
(3) JustETF. (z.d.). Vanguard FTSE All-World UCITS ETF (USD) Accumulating | A2PKXG | IE00BK5BQT80. www.justetf.com. https://www.justetf.com/en/etf-profile.html?query=IE00BK5BQT80&groupField=index&from=search&isin=IE00BK5BQT80#overview
(4) JustETF. (z.d.). iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) | A2H6ZT | IE00BDBRDM35. www.justetf.com. https://www.justetf.com/en/etf-profile.html?query=IE00BDBRDM35&groupField=index&from=search&isin=IE00BDBRDM35#overview