Today, I leave the pen to David Sertillange, investment enthusiast and author on EtreUnRenard. A follower of dense and complete articles, he is notably at the origin of a simple and easy method to automatically diversify his investments. He offers us today a brief introduction to a little-known investment and diversification tool: stock market trackers.
In the stock market, making the right choices at the right time is critical.
Indeed, by selling on the right day at the right price, you could earn a lot…
…but you could also lose a lot if the markets are against you.
To guard against such risks, any average investor adopts a technique of good family man: he diversifies his portfolio, to the maximum.
Only one problem with this approach:
It takes a lot of money to do it…
…and many of us individual investors only have a few thousand dollars to invest.
With 10,000 euros, it is difficult to cover currency risks, geographical risks, market risks and energy tensions at the same time.
What if… you just didn’t have to?
Today, I’m showing you how a little-known stock market tool can transform the job of portfolio diversification, making it super simple and super easy.
And not just a little… from 1,000 euros, you can hold shares in companies present in dozens of different sectors, in the four corners of the world and in at least 3 currencies.
Let’s go.
A tracker (also called Exchange Traded Fund in English) is a fund that owns shares of listed companies. The particularity of these funds is that they hold exactly the same proportion of an action in their portfolio as that contained in a benchmark stock market index.
Thus, if L’Oréal weighs 2% of the valuation of the CAC40, then a tracker replicating the CAC40 index must also own L’Oréal shares up to 2% of its portfolio.
In this way, the fund (also called a tracker) replicates exactly the fluctuations of the index it follows. If the stock market index (for example the CAC40) increases by 5%, the value of the fund will also increase by 5%!
So it’s a great tool for passive investing: if you want to spend little time managing your money, and following market performance suits you, then trackers are fantastic tools.
Indeed, since a tracker (also called ETF in English) follows exactly the variations of an index, by buying a share of the tracker you simultaneously buy shares in each company present in the reference index!
Thus, buying a share of a CAC40 tracker means owning L’Oréal, Carrefour, Accor shares at the same time. i.e. a little of all the 40 largest French companies.
In effect, you own shares in a fund that itself owns shares in all of these large companies.
The immediate consequence is that you immediately get incredible sector diversification.
Since you are invested in a plethora of industry sectors…variations in each sector will not affect your portfolio.
But that’s not all…
If you buy trackers replicating the Dow Jones or NASDAQ index, you are diversifying sectorally (by owning shares in several large American companies), but this time you are also diversified monetaryally, in American dollars.
And all this does not cost very much….
Here is for example a Lyxor tracker replicating the CAC40 index:
The action is only around 50 euros! The entrance ticket is thus rather low.
This is what makes trackers a perfect investment product for anyone who wants to build a low-budget portfolio while limiting risk.
After a little theory, it’s time to move on to practice: the choice of trackers.
For that, here there is no need for crazy calculation: there is a small free tool which finds for you the trackers corresponding to your profile : it is SmartPortfolio.
Its use is ultra-simple and only takes 2 minutes:
Here, we invite you to answer a super-quick questionnaire to determine your investor profile:
After answering a few questions about your investor profile, magic! A special tracker portfolio determined especially for you is displayed:
And there you have it, you have a portfolio of trackers totally adapted to your profile and diversified by sector and money. It’s super easy and totally free.
To go even further, Yahoo offers a list of all available trackers.
David Sertillange regularly reports on his discoveries on his site dedicated to investment. Adept at tricks and good plans, he writes them down so that they can be shared with as many people as possible.
To complete it all, David has produced an excellent infographic summarizing how trackers work, accessible just below the article (a small click to switch it to full screen 🙂 ). If this one has you more, I strongly invite you to share it on social networks and even more to discover David’s site on investment.
