Ever watched a sci-fi movie where people ate just one pill to get an entire day's worth of food? In that world, the creator of this miracle pill said that it was just too difficult to have a balanced diet; but futuristic technology allowed them to manufacture such pills, and thus extending humanity’s lifespans beyond 100.

It seems like a good idea, but perhaps a bit too unrealistic and maybe even crazy. But in the investment world, the equivalent of this miracle pill has already been around for years.

Index funds started during the days when the investment community didn't believe that a passive investment strategy worked. In fact, it wasn’t too long ago that index funds were an anathema to investors. Industry insiders argued you needed someone who knew how to “play” the market to have financial freedom. However, with an index fund, you’d just be investing in the “index” that represents the market. 

The late John Bogle is believed to be the father of index funds. His efforts in this space eventually led to the founding of Vanguard, which is today one of the world's largest fund managers with global assets under management of US$6.2 trillion. Since Bogle, and in the ensuing years of heated debate between the actives and the passives, we have liberation today: you don't necessarily need someone who knows how to decide what stocks to buy and sell if you want to invest.

It's possible—and could even be a good strategy—to just buy the entire market.

This is more so given that many mutual funds or unit trust funds, with their high costs, have underperformed their chosen index. (Funds always choose an index to compare their own performance to.) 

So if funds are underperforming indices, is it a good idea to just buy said indices? That's exactly what the trillion-dollar Vanguard Total Stock Market Index Fund has done for the US market, which is a great illustration of what passive investing is all about: doing away with the need to predict future movements of stocks and markets, and just accepting the returns that the market gives you. After all, the market is a self-correcting mechanism that will take into account government policy and human and business ingenuity.

Furthermore, wise investment management requires a change in mind-set. Investors need to look beyond the marketing hype that places a lot of faith in the superhuman ability to predict the future, and instead place more focus on asset allocation. As an investor, you need a personal strategy that is based on your own financial objectives, rather than on what or when individual stocks or currencies would go up or down.

Back in that sci-fi world, someone asked the pill’s creator if people should just cut out all of the feel-good but harmful stuff from their diet. “Of course not,” the inventor replied. “My diet pill is just a cost-effective way to give people a basic diet, which would hopefully free them from worrying too much about eating the right stuff.” So everybody who ate the magic pill didn’t have to abandon their sweet treats or decadent indulgences; but it did mean that they got everything they needed for daily nutrition without stressing about it, needing to become a nutritionist, or forking out an arm and a leg. 

If you catch my drift, that’s pretty much what ETFs can do for your investment objectives.

Today, trillions of dollars are flowing into ETFs, with global assets held by ETFs reaching US$7 trillion. This growth is driven by individual investors’ desire to get market exposure but at lower fees, by removing costs and middlemen. If you want to know what ETFs are, check out our Beginner’s Guide.