What’s This Euro Jump and Dollar Slide All About?
When it comes to investing, most people are probably a little bit more comfortable with something that’s predictable and not too risky. After all, the majority of us have steady jobs and paychecks that we can rely on to cover our fixed expenses each month. But what if that stable paycheck suddenly gets cut? Or what if you lose your regular source of income from a job or an insurance policy? Now things get a lot more stressful. Suddenly, the once-steady returns from fixed-income investments don’t seem so safe anymore. This is where the world of investing becomes a whole lot more fickle and risky for most people. Fortunately, there are ways around these risks and pitfalls as an investor. One strategy that has become increasingly popular over the past few years is investing in exchange-traded funds (ETFs). These aren’t your grandma’s stock certificates; they’re computerized financial instruments that let you buy into a collection of stocks or bonds without actually having any direct stake in them yourself. With an ETF, you can own an entire market segment or sector of the market while still keeping your risk levels to a minimum and your volatility within reasonable limits. Here’s what you need to know about investing in exchange-traded funds
What is an Exchange-Traded Fund?
First and foremost, an exchange-traded fund is a physical basket of assets held in trust by a financial institution like a broker-dealer. In other words, you don’t actually own any stocks or bonds in an ETF. Instead, you own their shares in trust, just like a shareholder in a corporation. Now, there may be several thousand different ETFs out there tracking different asset classes, including stocks, bonds, and commodities like gold or oil. But the most common ETFs track an index that tracks a whole market segment, like the S&P 500 or the Russell 1000. You can buy and sell ETF shares on an exchange just like you would regular shares of stock. But the most common way of investing in ETFs is to buy a mutual fund that owns the ETFs.
Why Invest in Exchange Traded Funds?
One of the biggest selling points of ETFs is that they let you invest in a whole market segment — or even a whole market — with just a small portion of your overall portfolio. This can be incredibly helpful as an investment strategy. For example, if you have a $500,000 portfolio and you want to put some money into a market segment that’s currently on rocky ground, you might be hesitant to take such a big risk. But what if you have $5 million in a portfolio of ETFs? Now, you can make a more modest but still significant investment in the specific market segment you want to target. Investing in ETFs also gives you a lot more options than investing in just stocks. Many investors like ETFs because they can offer a very low-risk portfolio without any heavy amount of risk. This is great for people who are generally risk-averse or who just want a low-volatility investment strategy.
How to Buy ETFs
After you’ve done some research on the different ETFs available, you’ll probably want to open an account with a brokerage. Since the majority of brokerage accounts these days come with the ability to buy ETFs included, this is a pretty straightforward process. Once you have an account with a brokerage, you can start researching different ETFs that meet your investment goals. You’ll probably want to start with the popular market-cap weighted indices like the S&P 500, the Dow Jones Industrial Average, or the iShares MSCI EAFE ETF. These are balanced collections of stocks that are weighted toward the entire US economy, so they’re great for investors looking for a general market strategy. Once you’ve got an idea of the type of ETFs you want to invest in and their general market segments, you can start looking at the specific ETFs themselves. Keep in mind that although some ETFs are created to track the exact same market segments as their index, others are created to track different asset classes and market segments. You’ll want to make sure you choose one that’s right for your investment strategy and your risk level.
Benefits of Investing in ETFs
– Low-Risk Investment Strategy: One of the main reasons people like ETFs is because they can create a low-risk investment strategy without a lot of risk. This is especially helpful for investors who are generally risk-averse or who just want a low-volatility investment strategy. – Flexible Investment Portfolio: Another benefit of investing in ETFs is that they let you build a flexible investment portfolio without having to put any money into each individual investment. This can be helpful for people who have a lot of work or family commitments that make it difficult to commit to a certain amount of time investing. – Inexpensive Investment Strategy: Finally, one of the biggest benefits of investing in ETFs is that they are extremely inexpensive. Even though they are computerized financial instruments, they are still much less expensive than buying individual stocks or bonds. This means you can maintain a relatively low cost of investing with a fairly small amount of money.
Drawbacks of ETFs
– Lack of Face-to-Face Meeting: One of the biggest drawbacks of ETF investing is that you don’t actually have to physically meet your broker-dealer. This means you can’t ask any questions or get any personalized investment advice from a real person. – Lack of Context: Another drawback of ETFs is that they don’t always give you enough context about the specific assets in the ETF. This means it can be difficult for you to make informed investment decisions. – Lack of Investment Strategy Diversification: Finally, the main drawback of ETF investing is that it usually doesn’t provide a very diversified investment strategy. This means you may be putting all your eggs in one basket if the specific market segment you’re investing in goes down hard. This can be especially risky for investors who have a lot of money in a single market segment.
Investing is one of the riskiest ways to build your financial future. That’s why it’s crucial to be prepared for the ups and downs of the market. That’s why you should consider investing in ETFs. ETFs are a great way to diversify your investment portfolio while still keeping your risk levels to a minimum. They’re also super cheap and easy to use, making them a great choice for anyone looking to get started investing. This is why we feel so strongly about offering a free investing guide to help you get started. We’ll take you through the basics of investing in a straightforward, step-by-step way. We’ll give you a list of the best ETFs to buy and point you in the right direction for further research on your own.