Paralysis by Analysis
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So, you have worked hard, adhered to your budget, and finally saved some money. Awesome! It's an accomplishment, but not mission accomplished. Now it is time to invest. For many this starts with building an investment portfolio based on their goals and risk profile. For this, investors start to research to determine what, where and when to invest.
This is where it can get intimidating for many. As you explore and realize the vast amount investment options available it can become very overwhelming. Then you begin to read various economic and market commentaries and start to dabble a bit with data and any bit of confidence you may have had can easily disappear. At this point you may begin to experience analysis paralysis.
What is analysis paralysis?
Analysis paralysis (or paralysis by analysis) can be described as the situation when you (or even a group of people) are unable to make a decision because of a continuous effort to over-analyze a problem and weigh pros and cons on what is perceived like a big decision. It is rooted in the fear of either making an error or the wrong decision. This phenomenon can apply to anything, including investing. It's not uncommon for investors to get wrapped up in the analysis of the many investing options until it becomes impossible to choose one.
Making a decision
Rather than trying to analyze every data point and investment product available, a starting point is to simplify your decision-making process. As termed by a famous pioneer of modern portfolio theory, diversification is the only free lunch in investing and a key to building an investment portfolio. In simple terms, diversification is the idea of purchasing multiple investments to help reduce risk and give you a great opportunity to make money in the stock markets. This is where indexing can become an important strategy to break the investment decision paralysis.
What is broad market indexing?
Index investing is an investment strategy where the goal is to track a benchmark index by purchasing securities that are held by the index and/or will perform in a like manner to the index. The desired result is to have similar performance to the index being tracked rather than trying to outperform the index that is often associated with active investing.
Indices come in all shapes and sizes, from those that track a broad swath of the investment market that may provide exposure to hundreds or thousands of stocks and bonds, to on the other extreme very niche indices that may have only a handful of securities held. There are also indices that seek to provide specific investment outcomes like growth, value, higher dividends, etc.
Broad market index investing is accomplished by obtaining exposure to an index that represents a large portion of the investment market and can be said to define that investment space. For example, a popular index to track the U.S. stock market is the S&P500 Index which tracks the largest 500 stocks trading on U.S. stock exchanges. When people refer to the performance of the U.S. stock market, they often quote the performance of the S&P500 Index as the measuring stick of such performance. An index which measures a larger or more diverse group of securities which may constitute an entire market can be said to be a broad market index.
Why invest in a broad market index?
Diversification - Different securities (stocks or bonds) will perform differently at different times. Diversification across a number of securities tends to minimize the risk of underperformance of an individual stock or bond negatively affecting your overall investment returns.
Lower cost – Costs are an important factor when making an investment decision. Things like management fees and commissions can eat away at your returns. Broad market index investing typically comes with lower fees which means that you keep more of the investment returns.
Performance - Broad market indices track the performance of an entire investment market while other exchange-traded funds (ETFs) will track a subset, segment or particular characteristic of the market. By capturing the entire market, broad market indices will not miss out on whatever part of the market is doing well.
How to invest in a broad market index?
There are a few ways you can go about this. One of the easiest ways is through ETFs which can give you exposure to hundreds of securities in one purchase. ETFs are investment products that are bought and sold on exchanges, much like stocks. The first step to buying an ETF is opening a registered or non-registered account with a discount brokerage, like TD Direct Investing.
About TD ETFs
As one of the largest institutional asset managers in Canada, TD Asset Management Inc. (TDAM) has been offering index investments to pension plans, endowments, and foundations for decades—but we've also been offering index investments to Canadians since before ETFs were invented, since 1985 in fact.
With a legacy of experience in passive investing, we also offer ETFs that are sector focused, quantitative active solutions from one of the largest quantitative teams in Canada, and fundamental active solutions from our award-winning portfolio managers.
To view our entire ETF line-up, visit us at td.com/etfs and download our TD ETF Product Guide.
The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus and ETF Facts before investing. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
TD ETFs are managed by TD Asset Management Inc., a wholly-owned subsidiary of The Toronto-Dominion Bank.
TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.
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