In my opinion one of the best investment tool is the ETF. ETF’s act a lot like mutual funds except just like stocks they can be bought and sold throughout the day. A lot of people like ETF’s because they track a specific sector or index which helps to promote diversity in your portfolio.
There are a few things you need to watch out for if you are going to invest in ETF’s. If you follow these tips you will boost your return and in turn your overall net worth.
- Watch out for Commissions and Expenses – One thing I love about ETF’s is that they tend to have much lower expenses than mutual funds do. With that said there are still a handful of companies that still charge more than the industry average. When you are scouting out investments make sure you pay attention to this. Depending on the size of your investment the difference between a service fee of 0.20% and 0.80% could be hundred or thousands of dollars every year. Depending on what ETF’s you decide to go with you can usually place your trades directly through them and they will waive the commission.
- Fight the Urge to Sell Short – For a stock investor, one of the toughest things not to do is try to sell the market short (bet that the market will go down) in a bear market. When things are looking a lot rough like they did in August and September it is very easy to say, “I’m going to jump in and get a piece of the pie on the downside.” Nine times out of ten you will probably sell short just as the market take a pop upwards. Leave the short selling to the professionals.
- Do not Leverage your Investment – When you leverage an investment you are essentially borrowing money from your investment firm. Let’s use a numbers example. Lets say you have $5,000 to invest and you leverage it with another $5,000. The market might go up which means you just doubled your gain but it could go down which means you just doubled your loss and you owe the broker money. You should only leverage an investment if you have the funds to cover a loss. For the normal everyday investor the risk is greater than the reward. Don’t leverage and your portfolio will thank you
- Don’t Watch the News – One of the biggest mistakes you can make as an investor is to watch the news. Even though with ETF’s you have the ability to buy and sell throughout the day like you can with individual stocks don’t make rash decisions based off the news. One analyst might talk about new worries in Europe during an interview and the market will drop 100 points. Two hours later European officials could say that everything is under control and the market could go up 100 points. By making a rash decision to sell after the bad news you would have lost a lot of money and the bounce back up.
- Diversification – Just like stocks you need to make sure you are well diversified. You never want to have more than 20% off your ETF portfolio in one sector. This will help to allow for a down day in one area be offset by the gain in another.
If you follow these five simple steps you will become a better and less tense investor. You will avoid a lot of pain to the downside.