How can you build an index fund?

Wealth accumulationHow you can provide for retirement with ETFs

Investment gurus are usually stingy with specific tips on how private investors should invest their money. Warren Buffett, one of the most successful investors of all time, is different in this regard. His letters to shareholders and speeches at general meetings are peppered with investment tips: He advises buying ETFs (index funds). "If you invest in an extremely cheap index fund and stretch your investment over ten years with a savings plan, you beat 90 percent of the people who invest at the same time as you," he said in 2004. "Find a very simple index like the S&P 500, a very cheap index fund on it, and expand your investment through a savings plan, ”he recommended in 2013. Finally, a year later, in a letter to his investors, he gave his heirs a tip on how to deal with his billions in assets. “Put ten percent of it in safe government bonds and 90 percent in an extremely cheap S&P 500 ETF. The long-term return of this strategy will beat that of most other investors. "

A simple investment strategy - a one-off investment or savings plans with ETFs on well-known indices - can hardly be a bigger accolade. Even one of the most successful active managers of all time, who has been collecting an average of 21 percent per year for his investors for more than 50 years, relies on cheap ETFs that copy an index.

Index funds are exchange-traded funds, the price of which follows exactly a certain index on stocks, bonds or all possible asset classes. Institutional investors have been using them for a long time - but they are still relatively new to private investors. ETFs are particularly interesting for this clientele because, unlike actively managed funds, they have extremely low fees. This is what makes them so interesting for long-term asset accumulation over 20 or 30 years, for example for old-age provision.

Consumer advice centers recommend ETFs

In Germany, more and more investors are following this advice: Around 560,000 private investors already have a savings plan on an ETF, as the finance portal extra-funds.de found in a monthly survey of the providers. This means that the number of ETF savings plans has more than tripled within three years.

The providers of other forms of asset accumulation can only dream of such growth rates - regardless of whether they are stocks, real estate or private life insurance policies. However, there are good reasons for the growth in ETFs. “Only a few financial products are recommended by consumer advice centers. ETFs are one of them: You don't need expensive fund management because they replicate an index. That saves costs and increases the expected return, ”argues Niels Nauhauser, financial services advisor at the Baden-Württemberg consumer center. Banks are reluctant to sell, precisely because ETFs are often - albeit not always - very cheap.

A very simple and long-term lucrative investment, for example in an ETF that follows the German Dax share index, is available for 0.1 percent fees per year, globally diversified share and bond ETFs hardly cost more.

But that also means: unlike in Riester contracts, active funds or life and pension insurance, ETFs do not contain any fees for advisors who encourage investors in the event of a crisis. Index funds are therefore an instrument for those investors who take their financial investments into their own hands. With all the opportunities, but also all the risks inherent in a self-made system, such as the required self-discipline.

Capital has therefore defined six steps that enable even beginners to understand the ETF market and its sometimes complex terms - and to use ETFs for long-term asset accumulation, especially for old-age provision.

The article was published in Capital Extra - Special issue Wealth accumulation "The plan for your life". You can order the whole issue here