If you’re stepping into the stock market for the first time, it’s essential to understand a few fundamental principles that can shape your investment journey.
Firstly, the concept of volatility—stocks moving up and down—is an integral part of the stock market. This inherent fluctuation is not just a risk but also a gateway to potential long-term gains.
Secondly, predicting the future price of a stock is a notoriously challenging endeavour. Even experts and seasoned investors, with rare exceptions like Warren Buffett, face uncertainties when forecasting long-term stock movements.
This leads us to the third principle: diversification. Often hailed as the only “free lunch” in investing, diversification is about spreading your investments across various stocks from different sectors and countries—this way, a loser won’t tank your entire portfolio.
With these three principles in mind—I want to introduce a unique index fund that stands out as an excellent choice for beginners. This fund embodies the essence of these principles, making it an ideal candidate for those looking to buy and hold for the long term.
What is an index fund anyway?
Imagine sitting down with a notepad and jotting down a list of criteria for the kinds of stocks you’d like to own. Perhaps you’re interested in companies from specific countries, or maybe you’re drawn to certain sectors. You might also consider the size of these companies, referred to as market capitalization, and how you would balance or weight them in your portfolio.
This thought process, where you’re outlining a set of rules for selecting and managing investments, captures the essence of what indexing is all about.
Indexing is essentially a methodology or a set of rules designed to benchmark a segment of the stock market. This approach provides a systematic way to capture the performance of a particular market niche, whether defined by geography, industry, or company size, among other factors.
The benefits of indexing are manifold. For starters, it’s a hands-off investment strategy. Once the rules are established, the index follows them systematically, reducing the need for constant decision-making or adjustment. This leads to low turnover, which can help minimize transaction costs and tax implications.
But perhaps the most significant advantage is that there are funds—known as index funds—that replicate these indexes, allowing investors to invest in a broad market segment with a single transaction.
My favourite index fund
My top pick for an index fund is iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW). This choice might seem a bit specific at first glance, but there’s a compelling reason behind it. XAW aims to provide exposure to a broad range of stocks from the global market, excluding Canada.
The way XAW operates is quite interesting—it holds multiple other index funds, each of which tracks different segments of the U.S. and international markets. This structure means that when you invest in XAW, you’re not just buying into a single fund; you’re gaining exposure to a curated selection of ETFs that cover a vast portion of the global economy.
Regarding costs, XAW has a management expense ratio of 0.22%. So, for an investment of $10,000, the annual fee would amount to $22. This fee structure is relatively low, especially considering the broad market exposure and the convenience it offers.
One notable aspect of XAW is its deliberate exclusion of Canadian stocks. This omission is purposeful, allowing investors to tailor their portfolios by selecting Canadian stocks independently. This feature is particularly appealing for those looking to build a diversified core portfolio using index funds while also exploring stock-picking within the Canadian market.
