How to Start Investing in ETFs: A Step-by-Step Guide for Long-Term Investors (Money Talk 78 with Petra Gordan)

Milan Dubec

Introduction to Petra Gordan and Long-Term Investing [0:00] [0:35] [0:49]

• Petra Gordan, a financial expert, shares her journey of achieving financial freedom through disciplined investing. [0:00]
  • She started investing in stocks at 24, dedicating half her salary to investments.
  • She later generated additional income by renting out her apartment on Airbnb, further fueling her investments.
  • After 10 years, she considers herself financially independent.
• The discussion aims to provide a step-by-step guide to ETF investing for regular individuals without complex strategies or high fees. [0:35]
• The hosts emphasize the importance of long-term investing for wealth creation, contrasting it with a common short-term, high-return mentality that often leads to disappointment. [0:49]
  • Milan Dubec shares his 25-year investment journey, highlighting the power of long-term consistency.
• Key topics to be covered include financial reserves, debt management, types of ETFs, market timing, investment platforms, and mental resilience for investors.

How Petra Would Set Up Investments for an Average Family [1:55]

• Petra's approach starts with a comprehensive financial assessment. [4:03]
  • Initial financial audit: Before investing, a family should analyze their income and expenses to understand their financial flows.
    • Many people are unaware of where their money goes.
    • Tracking expenses (e.g., via Revolut or bank statements) helps identify areas for savings. [5:29]
  • Building a financial reserve: This is the foundational step.
    • The goal is to have at least three times the household's monthly income saved for unexpected expenses. [6:29]
    • For a family with a €2,500 net income, this means having approximately €7,500 readily available.
    • This reserve provides psychological comfort and prevents reliance on debt during emergencies.
  • Addressing housing needs:
    • If a family doesn't own their home, they should prioritize resolving their housing situation.
    • This might mean buying a home (with a mortgage) or renting.
    • The decision between renting and buying depends on a detailed mathematical calculation comparing mortgage payments, initial capital required, and potential investment returns versus rental costs.
    • For those without a mortgage, solving the housing situation comes before stock market investments.
      • Mortgages typically require 20-30% of the property value as a down payment.
      • If an individual can invest that down payment amount better than their mortgage interest rate, then renting might be a viable alternative to buying.
  • Eliminating bad debt: [10:48]
    • "Slovak combo of debt" (Slovenské kombo zadlženia): This refers to a common situation where individuals accumulate various types of expensive debt.
      • Credit cards, car leases, consumer loans for electronics (like TVs or iPhones) are considered bad debt.
      • These debts often come with high interest rates (e.g., 25% for credit cards if payments are late) and are not sustainable for long-term wealth building.
    • Prioritize debt repayment: Any debt with an interest rate higher than the expected long-term return of equity investments (typically 8-12% for S&P 500 historically) should be prioritized for repayment.
      • Paying off a loan with a 9% interest rate is a guaranteed 9% return on your money, which is often better and less risky than many investments.
    • Mental shift: It's crucial to adopt a mindset where you only spend what you earn. Taking on consumer debt for non-essential items is detrimental to financial well-being.
    • Consequences of bad debt: Being unemployed with significant consumer debt can quickly lead to financial distress and even execution.

Investing in ETFs and Recommended ETFs [16:08]

• Understanding ETF basics: [16:06]
  • ETFs (Exchange-Traded Funds) are a collective investment vehicle that offers diversification across various assets.
  • They are publicly traded on stock exchanges, making them liquid and transparent.
• Why ETFs are recommended for long-term investors: [17:15]
  • Diversification: ETFs allow investors to own a broad portfolio of assets (e.g., 500 companies in S&P 500) with a single purchase, reducing risk compared to individual stocks.
  • Low fees: Passively managed ETFs typically have very low expense ratios, maximizing investor returns.
  • Simplicity: They offer a straightforward way to invest without needing to constantly monitor individual company performance.
  • Long-term growth: Historically, broad market indexes like S&P 500 have generated average annual returns of 10-12% over long periods (50+ years).
• Financial advisor strategies and pitfalls: [18:27]
  • Some financial advisors might push products with high upfront fees (e.g., 3.5% for the first 18 months of contributions), which significantly eat into initial investments.
  • They might also recommend portfolios heavily weighted towards certain sectors (e.g., tech, or even specific companies) or real estate funds with low returns, under the guise of diversification.
    • For example, an advisor might suggest a portfolio split between S&P 500, NASDAQ, MSCI World, and a real estate fund. This often leads to overexposure to tech (as S&P 500 and MSCI World also have significant tech components) and low returns from real estate funds (which historically yield around 4% before tax).
    • Such approaches might generate better commissions for the advisor but are not optimal for the investor.
• Recommended ETFs for diversification and growth: [21:05]
  • Passive ETFs: These are funds that track a specific market index. They aim to match the performance of the index rather than trying to beat it.
    • S&P 500: Tracks the 500 largest publicly traded companies in the United States.
      • While primarily US-focused, many of these companies are global giants, so investing in S&P 500 provides exposure to the global economy.
    • MSCI World: Represents large and mid-cap equities across 23 developed markets globally. Offers broader geographical diversification than S&P 500.
  • Avoid active funds and certain real estate funds in long-term portfolios:
    • Funds that consistently deliver only 3-4% annual returns (especially before taxes) effectively "rob" the investor of potential earnings when market indexes historically yield much more.
    • Actively managed funds typically have higher fees and rarely consistently outperform their benchmark indexes after fees.

Accumulation vs. Distribution ETFs and Dividends [31:58]

• Dividend definition: A dividend is a portion of a company's profit distributed to its shareholders. [31:58]
• Distribution ETFs: These ETFs pay out dividends to the investor, who then receives this cash in their account.
  • Tax implications: In Slovakia, dividends from distribution ETFs are subject to income tax (19% for capital gains + 14% for health contributions, totaling 33%).
  • Compounding disadvantage: If the investor doesn't immediately reinvest the dividends, they lose out on the power of compound interest.
• Accumulation ETFs: These ETFs automatically reinvest any dividends received back into the fund by buying more shares. [34:25]
  • Tax advantages: In Slovakia, if an investor holds an accumulation ETF for more than one year, the profits from the sale are exempt from capital gains tax (the "time test" for publicly traded securities).
  • Compounding advantage: Automatic reinvestment leverages compounding, leading to potentially much higher long-term returns.
• Petra's recommendation: For long-term investors, accumulation ETFs are strongly preferred due to their tax efficiency and the benefits of compounding.
  • If you hold a distribution ETF, you actively choose to pay tax on dividends and then decide whether to reinvest them, potentially incurring additional fees or losing time in the market.

When and How to Enter the Market [35:31]

• Dollar-Cost Averaging (DCA): This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. [35:31]
  • Mitigates market timing risk: Since predicting market movements is impossible, DCA helps average out the purchase price over time.
  • Benefits during market downturns: When the market falls, your fixed investment buys more shares, which can lead to higher returns when the market recovers.
    • Petra shares an example: if the market drops by 30% tomorrow, a consistent monthly investor (like her hypothetical client) will be fine because their subsequent contributions will buy more shares at a lower price, effectively "evening out" the decline over time.
  • Consistency is key: Regular contributions, even small ones, are more important than trying to time the market.
• The "Danaian gift" (Trojan horse) of active trading/speculation:
  • Some people are tempted to quickly "turn over" money in the market, often seeking high short-term gains.
  • This speculative approach is often a recipe for loss, especially for inexperienced investors.
  • The mental trap: Investing a lump sum and then seeing a market downturn can cause panic and lead to selling at a loss.
  • The illusion of quick money: The desire for quick returns often pushes people towards risky investments or financial products with hidden fees that erode capital.
• Long-term perspective is crucial: [37:41]
  • A true long-term investor is prepared for market fluctuations and views downturns as opportunities to buy more assets at a lower price.
  • Warren Buffett emphasizes that for most people, the best strategy is to invest in broad market indexes and ignore daily market noise. He himself has never tried to time the market.
  • You must decide if you are a "speculator" (focused on short-term gains) or a "long-term investor" (focused on wealth building over decades).
    • If you are a speculator, then daily market movements might be interesting, but it's a high-risk endeavor.
    • If you are a long-term investor, focus on consistent contributions and ignore the noise.
• Avoid short-term investing in volatile assets:
  • If you need your money within 1-2 years (e.g., for a down payment on a house), do not invest it in the stock market. Keep it in a safe, liquid account.
  • Short-term investments are highly susceptible to market volatility, and you might be forced to sell at a loss.
• Mental preparedness:
  • Investors must be mentally ready to see their portfolio value decline, understanding that it's a temporary fluctuation in a long-term strategy.
  • Petra warns against the "legends" of losing everything in a 50% market crash; while crashes happen, long-term investors who stay disciplined typically recover and profit.
  • The most successful investors are those who can emotionally detach from short-term market movements and stick to their long-term plan.

Platforms for Investing and Standing Orders [39:37]

• Choosing an investment platform: [39:37]
  • Low-fee brokers: Petra recommends choosing platforms with minimal fees to maximize returns. [40:53]
    • Interactive Brokers (IBKR): A highly regarded global broker.
      • Offers a wide range of investment products (stocks, ETFs, etc.) and low trading fees.
      • Requires some English proficiency and understanding of investment concepts.
      • The account opening process involves a knowledge test to ensure the investor understands the risks.
      • Now offers a platform specifically for European clients, often registered in Ireland, which has tax advantages for EU residents.
    • XTB: A Polish broker, popular in the region.
      • Similar to IBKR in offering various assets, including forex, but Petra advises caution with high-risk products like CFDs (Contracts for Difference).
      • Has a user-friendly platform available in local languages (e.g., Slovak, Czech).
      • Potentially easier to navigate for beginners compared to IBKR.
    • Czech platforms (e.g., Fondee, Portu): These robo-advisors offer automated portfolio management.
      • Simpler to use than traditional brokers.
      • Fees are generally higher than self-directed low-cost brokers (e.g., 1% annual management fee), but still lower than many traditional funds.
      • These platforms often use Interactive Brokers as their underlying infrastructure.
  • Avoid high-fee investment products:
    • Be wary of financial products or advisors who charge significant upfront or ongoing fees (e.g., 1% annual fee for passive investing with a robo-advisor is generally acceptable, but 3% or more is too high).
    • For regular investors, the goal is to keep costs as low as possible.
• Setting up a standing order (trvalý príkaz): [41:45]
  • Automated contributions: Once you've chosen a platform, set up a recurring bank transfer (standing order) to automatically send money to your investment account each month.
  • Discipline and consistency: This automation ensures you stick to your investment plan, regardless of market sentiment or personal financial distractions.
  • Benefits: [43:16]
    • Regular, consistent investing through DCA.
    • Reduces the psychological barrier of manually deciding when and how much to invest.
  • Petra's advice: Start with an amount you are comfortable with (e.g., €200 from a €2,500 income) and gradually increase it as your income grows or expenses decrease. [45:00]
    • The most crucial step is to start and maintain consistency.