Higher return and lower risk

Dear Mr Tan,

Indeed, having read through your website, I have come to understand just how great ETFs are, esp the STI ETF. You mentioned that STI ETF is like a unit trust, less those high expense ratio and high sales charge. You also highlighted that for long term investors, it is good to invest in ETF.

Having thought through quite some time, I don't get the logic. Since STI ETF can be bought and sold like shares, why is it beneficial, especially to long term investors?

REPLY
Shares are likely to earn a higher return compared to bonds and other safer investments. But shares are volatile, i.e risky.

By investing in a fund comprising of many shares, you reduce the risk through diversification. By investing for the long term, you average out the good and bad years, to get an average long term return.

Hence, a low cost investment fund, such as ETF, allows you to earn a higher return (from shares) and reduce the risk through diversification.