dear africa – why ETFs

dear africa

Some of you asked me if you should buy Sasol shares. It does not have to be Sasol actually, it can be any company, a few years ago it was Steinhoff (when it tanked and people thought it will recover), a few weeks ago it was Telsa, yesterday it was Oil. There will always be that 1 or few companies in the news cycle. My answer is always simple and boring, if you have some money to play with, and you will not cry if that company’s price tanks completely, then sure, go ahead. If the price skyrockets, that is not going to make you an instant billionaire either, well, unless your play money is in the millions.

If however, you want your money to be there next week, next month, next year, and in 10-20 years, then I tell you to buy a low cost broad market ETF.

Lets take the S&P 500 Index as an example. Apple Inc has the biggest weighting in that index with a whopping 4.58% (as at 31 December 2019).
This means that if you invested R100, and Apple somehow disappeared off the face of the earth permanently without trace, you will only lose R4.58c. I know this is unlikely, but remember Blackberry or Nokia?
The top 10 is completed by Visa Inc, with a weighting of 1.20%, If that vanishes, you will only lose R1.20c. And if or when company number #499 does vanish, which is more plausible, your holding will hardly show a sign of decline, because that company #499’s weighting is roughly 0.00000000009%.

You can also buy Individual shares if a seasoned Financial Asset Manager told you so, one with many years of successful track record of picking the right stocks and beating benchmarks consistently, In other words, if a unicorn told you to.

Otherwise, buy a low cost broad market ETF, like the S&P 500.

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