US economist Harry Markowitz famously said that "diversification is the only free lunch in investing".
And this is absolutely true.
By spreading your risk across different stocks, sectors and geographies, your nest egg isn't vulnerable from a radical downturn in a particular industry or country.
One of the easiest ways of diversifying is buying shares in ASX ETFs rather than picking individual stocks.
For example, if you buy one share in an ETF like Vanguard Australian Shares Index ETF (ASX: VAS), it will give you the same effect as investing in every company in the S&P/ASX 300 (ASX: XKO).
Yes, 300 companies!
So can you retire on ASX ETFs alone?
Active investing is possible with ETFs
The Motley Fool US' Maurie Backman, recently wrote in her Can I Retire on ETFs Alone? article that one of the disadvantages of solely investing in ETFs is sacrificing the potential to beat the market.
I wholeheartedly disagree with this.
These days investors are fortunate enough to have access to a dizzying array of thematic ETFs that do not follow a broad-market index.
If you think, for example, the battery materials producers will do better than the rest of the market, you can buy shares in an ETF like Global X Battery Tech & Lithium ETF (ASX: ACDC).
Do you think Chinese listed companies might outperform their counterparts in other nations? You can buy into Betashares Asia Technology Tigers ETF (ASX: ASIA).
Sure, you might not nab a 10-bagger like you might with an individual company stock. But the huge number of thematic ETFs still allows one to vary significantly from indices, which is called active investing.
This contrasts with index ETFs that are considered passive investing.
Saving time so you can do more fun stuff
The other great thing about buying ASX ETFs is saving time on research.
The fund operators do all the stock picking on your behalf, so there is no need for the investor to investigate the merits of specific companies.
One caveat is that if you buy into thematic ETFs, you do need to keep a careful eye on the tailwinds and headwinds for those themes.
This is how you retire on just ETFs
So can you retire on ETFs or not?
Of course you can.
I wrote a hypothetical playbook earlier this week on how a 30-year-old and a 40-year-old could both retire with a million bucks by the time they turn 58 years old.
You can check out the formula in that article, but the summary is that I used just three ETFs to put their entire nest egg into:
- Vaneck Morningstar Wide Moat Etf (ASX: MOAT)
- Betashares Nasdaq 100 ETF (ASX: NDQ)
- Vanguard Australian Shares High Yield Etf (ASX: VHY)
These provide a mixture of investment exposure to US shares and Australian shares, and a blend of growth and income stocks.
Good luck with your investments.