Investing can get a little complicated once someone is approaching the last working years of their life. Retirement planning can be difficult, as you have to worry about where the next 30-40 years' worth of paycheques might be coming from. But if you're under 40, investing can be far simpler.
Under-40s have the most valuable commodity in the world on their side – time.
Time's value in the equations of compound interest is immeasurable. After all, Warren Buffett only became a billionaire at age 50. Today, in his 90s, Buffett is worth more than US$100 billion. That tells you all you need to know.
It's my view that all younger Australians, not just those with a taste for finance and numbers, can successfully invest. And all they need for adequate diversification and decent returns are two ASX exchange-traded funds (ETFs).
ETFs, specifically index funds, work by investing in hundreds of underlying shares. Most spread investors' money across the largest stocks on a share market, weighted towards market capitalisation (meaning the largest companies receive the most dollars).
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An ETF for ASX shares
For example, the Vanguard Australian Shares Index ETF (ASX: VAS) tracks the largest 300 shares on our ASX share market. That's everything from Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW) to JB Hi-Fi Ltd (ASX: JBH) and Ampol Ltd (ASX: ALD).
Since CBA is the largest company in Australia, it commands a weighting of over 11% in VAS' overall portfolio. In contrast, smaller companies like Ampol are only worth around 0.25% of said portfolio.
The index that tracks these 300 shares, and which the VAS ETF mirrors, is rebalanced every three months. This ensures that the ASX's long-term winners rise to the top over time, while the losers are slowly weeded out. This aspect makes an index fund like VAS very easy for investors to own over long periods of time, as it requires almost no effort on their part. You can buy units, put them in the proverbial bottom drawer, and forget about them if you wish, safe in the knowledge that they are still compounding on your behalf.
Most investors under 40 would be fine just holding the Vanguard Australian Shares ETF. After all, ASX shares have provided strong dividends and decent overall returns for decades. However, I think it would be wise for investors to add at least one more ETF – one that tracks the US markets.
Adding US stocks to the mix
The United States has long been home to the world's most dominant companies: Coca-Cola, McDonald's, Mastercard, American Express, Ford, Amazon, Colgate-Palmolive, Apple… the list goes on. The ASX is wonderful, but it simply cannot compete with the USA for the sheer influence its companies command on our everyday lives. That's why I think the US markets are a great place to invest, particularly for under-40s.
Thankfully, you can buy the best of America with just one more index fund. The iShares S&P 500 ETF (ASX: IVV) tracks the largest 500 companies listed on the US markets, just as VAS does for the 300 largest stocks on the Australian markets. For one, buying units of this ETF automatically gives an investor exposure to all of those companies listed above, and hundreds more. But it also adds some geographic and currency diversification.
If you're someone under 40 and you wish to build a strong financial future for yourself and perhaps your family, all you need to do is invest what you can, when you can, into these two ASX ETFs. If you do this consistently, you can enjoy the benefits of investing and, hopefully, a full and wealth-filled retirement one day.
