Many people believe that the key to financial success is to find the right stock pick and then ride it for as long as possible.
However, this method is often fraught with risk, as even the best-performing stocks can experience sharp downturns. Why?
Because the stock market is inherently volatile, and no one can predict with 100% accuracy which stocks will succeed and which will fail.
So, if you’re looking for a safer, more diversified way to invest in the stock market, you may want to consider exchange-traded funds (ETFs).
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What is ETF?
ETFs are baskets of securities that track a particular index, such as the S&P 500. This means that they offer the potential for both long-term growth and immediate diversification. In addition, ETFs are often much cheaper than traditional mutual funds, making them an ideal choice for cost-conscious investors. For these reasons, ETFs can be an excellent way to build long-term wealth.
In the past 5 years, the number of ETF has grown exponentially. In 2018, there are over 5,000 ETFs available globally with more than $3 trillion in assets under management.
So, why should you start investing in ETFs? Here are three reasons:
Reason 1: ETFs provide diversification and allow you to invest in a variety of asset classes.
Exchange-traded funds (ETFs) have grown in popularity in recent years, and for good reason. ETFs offer investors a number of advantages, including diversification and the ability to invest in a variety of asset classes.
Diversification is important because it helps to mitigate risk. By investing in a variety of asset classes, you can protect your portfolio from the volatility of any one particular asset class. For example, if the stock market declines, you may still be able to generate returns from your investments in other asset classes such as bonds or real estate.
ETFs also offer the flexibility to adjust your investment strategy as market conditions change. For instance, if you believe the stock market is due for a correction, you can sell your equity ETFs and moving into cash or bonds. ETFs provide investors with a great deal of flexibility and choice when it comes to constructing a portfolio that meets their individual needs.
Reason 2: They offer tax efficiency and liquidity.
For many investors, exchange-traded funds offer the best of both worlds: the tax efficiency of a index fund and the liquidity of a stock.
ETFs are structured as either open-end mutual funds or unit investment trusts, which means they are not subject to the same capital gains taxes as other investment vehicles. And because ETFs trade on exchanges, they can be sold any time during market hours. For these reasons, ETFs have become increasingly popular with both individual and institutional investors. In addition, ETFs often offer lower expense ratios than mutual funds, making them an even more attractive option for cost-conscious investors.
Reason 3: ETF tend to have lower fees than other investment options.
As anyone who has ever invested in a mutual fund knows, fees can quickly eat into your profits. And while there are plenty of options out there that claim to have low fees, they often come with other strings attached.
Exchange-traded funds, or ETFs, tend to have some of the lowest fees available. Because they are traded on an exchange, they are subject to the same rules and regulations as stocks.
This means that they are required to disclose their holdings and pricing information on a regular basis. As a result, ETFs offer investors a high degree of transparency and accountability.
And because they don’t have to contend with the same overhead costs as traditional mutual funds, they are able to pass along these savings to shareholders in the form of lower fees. For investors looking for a low-cost way to invest in a broad range of assets, ETFs are hard to beat.
The average fee percentage of ETF is 0.44%. The average fee percentage of mutual fund is 1.25%.
When it comes to fees, ETFs are the clear winner.
Reason 5: ETF usually require a lower minimum initial investment
Many people are put off investing in stocks and shares because they think that it requires a large amount of money to get started. However, this is not always the case. ETFs (Exchange Traded Funds) are a type of investment fund that can be bought and sold on stock exchanges, just like regular shares.
One advantage of ETFs is that they usually have a lower minimum initial investment than other types of investment funds. This means that you can start investing with a smaller amount of money, which may make it more accessible for some people.
ETFs also have the benefit of being very flexible, as you can buy and sell them at any time during the trading day. This can make them a good choice for people who want to be able to take advantage of short-term market movements.
Why do many people ignore ETF and prefer stock picking?
There are a number of reasons why people might choose to pick individual stocks over investing in an ETF. For some, the appeal lies in the potential for greater returns. With a managed fund, the investment is spread out over a number of different assets, which can help to reduce risk but also limit upside potential. By picking individual stocks, investors have the potential to achieve higher returns if they select winners. However, this approach also comes with greater risk, as it is possible to lose money if the stock price falls.
Another reason why some investors prefer stock picking is that it gives them more control over their portfolios. ETFs are designed to track a specific index or sector, meaning that there is less opportunity for active management. For investors who like to be involved in day-to-day decision making, stock picking may be a more appealing option.
Finally, some people simply find the process of analyzing and selecting individual stocks to be more enjoyable than tracking an ETF. While there is no right or wrong answer when it comes to investing, it is important to understand the pros and cons of each approach before making a decision.
How should I start investing in ETF?
If you’re thinking about investing in an ETF, there are a few things you need to consider before taking the plunge. First, what is your investment goal? Are you looking to grow your wealth over the long term, or are you more interested in generating income? Next, what is your risk tolerance? Are you willing to accept higher risks in exchange for potential higher returns, or would you prefer a more conservative approach?
Finally, how much time do you have to devote to monitoring your investment? If you don’t have the time or inclination to stay on top of things, a hands-off approach may be more appropriate. Once you’ve answered these questions, you can start researching specific ETFs that align with your goals and risk profile. With thousands of ETFs to choose from, there’s sure to be one that’s a perfect fit for you.
Personally, my to-go-ETF are the famous Vanguard VOO and VTI – both offer low-cost and broad exposure to the US stock market. I know I could sleep well at night with my money well invested in these two ETFs because it’s a low-cost investment and I’m diversified across the market. These 2 ETFs also have produced significant and consistent return over a long period of time compared to individual stocks. Even though I still have some stocks allocation in my portfolio, a large proportion is allocated towards these 2 ETFs.
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