Choosing an ETF is relatively easy when markets are rising. The real challenge comes when your investment underperforms, other investors are celebrating bigger gains, and you start wondering whether you should have chosen something else.
If I were choosing one ETF to accumulate regularly over the long term, I would consider the Vanguard Total World Stock ETF (VT).
My reason is not that I expect it to deliver the highest returns every year. Instead, I like the idea of investing across global markets without having to predict which country, sector or group of companies will lead the next decade.
However, there is a trade-off that every VT investor needs to understand: global diversification can mean accepting periods of underperformance while other markets take the lead.
1. Why VT would be my choice
The US stock market has produced impressive returns, particularly through its largest technology companies. AI has added another powerful growth theme, attracting investors to businesses involved in semiconductors, cloud computing and data centres.
It is tempting to focus entirely on these opportunities. But market leadership does not remain constant forever.
Economic growth, interest rates, valuations, currencies and corporate earnings can affect different markets in different ways. A country that performs exceptionally well during one period may lag during another.
VT provides exposure to thousands of companies across developed and emerging markets. Its holdings span industries including technology, healthcare, financials, consumer goods and industrials.
Rather than deciding how much to allocate to every country or trying to identify the next winning sector, I would have exposure to a broad range of businesses through a single ETF.
VT still has substantial exposure to the US, so it can participate in American market growth. Its international holdings provide additional exposure beyond the US.
For me, the attraction is not that every market will perform well at the same time. It is that I would not need to predict which market will perform best before investing.
2. The hardest part: Watching other ETFs outperform
Imagine the US market continues to rally while European and Asian markets struggle. A US-focused ETF could outperform VT significantly over several years.
Meanwhile, technology-focused investors might see even stronger gains during an AI-driven rally.
It would be natural to question whether holding VT was the right decision.
Why settle for broader market exposure when a more concentrated ETF appears to offer greater potential?
This is where investment discipline becomes important. When an ETF consistently lags behind another investment, it can be tempting to abandon the original strategy and move into whatever has recently performed best.
But recent performance does not tell us which investment will lead next.
By the time a trend becomes obvious, much of the price appreciation may already have occurred. Switching repeatedly can lead to buying after strong rallies and losing confidence after declines.
If I chose VT, I would need to accept that it might not win every performance comparison. The objective would be to maintain broad global exposure rather than constantly chase the latest market leader.
That does not mean ignoring performance or refusing to review my investments. It means distinguishing between a strategy that is temporarily underperforming and one that no longer meets my needs.
3. Why I would keep investing through different market cycles
Regular investing appeals to me because it creates a consistent process.
When markets rise, contributions continue building my position. When prices fall, the same amount of money buys more shares.
Of course, a lower price does not automatically mean an investment is cheap, and markets can continue falling for an extended period.
The benefit is that I would not have to make every purchase based on a prediction about the next market move.
Consider a period when economic uncertainty causes global equities to decline. Investors may worry about recession, corporate earnings or geopolitical developments. It can be tempting to stop investing until the outlook becomes clearer.
However, clarity often arrives only after markets have already moved.
If my financial circumstances remained stable and my investment horizon were still long, I would generally prefer to follow my established investment schedule rather than react to every headline.
I would not increase contributions simply because prices had fallen, unless the additional investment fitted my budget and risk tolerance. Nor would I assume that a recovery was guaranteed.
The aim would be to remain consistent without taking risks I could not afford.
4. Does global diversification really protect a portfolio?
Diversification is useful, but it is not a guarantee against losses.
VT spreads exposure across companies, sectors and countries, reducing dependence on any single business or market. However, global markets can fall together during periods of widespread financial stress.
A global recession, rising borrowing costs or a sharp decline in investor confidence can affect companies across multiple regions simultaneously.
VT is also an equity investment. It can experience substantial declines, and investors who need their money during a downturn may be forced to sell at an unfavourable price.
That is why I would consider my investment horizon before committing money to VT. Funds needed for near-term expenses should not automatically be invested in an all-equity ETF.
I would also keep emergency savings separate from my investment portfolio.
For me, diversification is not about eliminating risk. It is about avoiding unnecessary dependence on one particular market while accepting that equity investing will still involve uncertainty.
5. What could make me reconsider VT?
Long-term investing should not mean holding an investment without reviewing it.
I would reconsider my approach if my financial goals changed, I needed access to my money sooner, or the level of risk no longer suited my circumstances.
I would also periodically review the ETF’s geographic allocation, sector exposure, fees and overall suitability.
Another consideration is cost. VT is listed in the US and trades in US dollars. For investors making relatively small regular purchases, brokerage charges and currency conversion fees can reduce returns over time.
New Zealand investors should also understand the tax treatment of overseas investments, including whether the foreign investment fund rules apply to their circumstances.
These practical details may seem less exciting than discussing the next potential multibagger, but they can affect the actual outcome of a long-term investment strategy.
6. My advice to someone starting out
I would start by deciding what role the ETF is meant to play in my portfolio.
Am I trying to build long-term wealth? Do I want broad global exposure? Can I tolerate a significant decline without needing to sell?
Once those questions are answered, I would choose an investment amount that fits my budget and establish a contribution schedule I could maintain.
I would avoid comparing my portfolio with every high-performing stock or ETF. Someone holding a concentrated technology portfolio may achieve higher returns during a strong rally, but that concentration also creates different risks.
The important question is whether the strategy fits my own objectives, not whether it outperforms every alternative in every market environment.
I would also remember that DCA does not guarantee better returns than investing a lump sum. Its appeal lies in providing a structured way to invest gradually, particularly for people who receive income regularly and want to build their portfolios over time.
Final thought
I would choose VT because I do not want my long-term investment strategy to depend on correctly predicting which country will dominate the next decade.
But I recognise the psychological challenge. There may be years when US-focused ETFs outperform, technology stocks surge, and global diversification feels like a disadvantage.
That is the trade-off I would have to accept.
For me, the real test of long-term investing is not simply continuing to buy when prices fall. It is staying committed to a sensible strategy when something else looks more attractive.
VT would not guarantee the highest returns, but it would give me broad exposure to global businesses without requiring me to constantly guess where the next opportunity will emerge.
For discussion purposes only. Not financial advice.
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