Most people have heard about the wisdom of diversifying an investment portfolio to protect it against losses. The theory is that if the investor has a mixture of various stocks, they will be shielded in the event that one stock takes a nosedive. So, if tech stocks are falling, perhaps real estate stocks are on the rise. That keeps the investor from suffering overall losses, which sounds great. The challenge for new or even seasoned do-it-yourself investors is how to acquire enough diversification to achieve that kind of balance.
The answer to that quandary has become Exchange Traded Funds, which are also called ETFs. ETFs are an investment tool which allows investors to buy small amounts of hundreds of different stocks and other commodities all in one simple transaction. ETF investing is a relatively new innovation, one that can have tremendous advantages for people who are new to investing.
Buying an ETF is in many ways like buying shares of individual stock. The transaction can be accomplished through a broker in a traditional office setting, or online. With many brokers cutting the price for transactions, this can be an affordable and realistic way for new investors to diversify their portfolio. For fees as inexpensive as $4 or $5 per transaction, investors can begin to buy ETFs. Another advantage to this type of investing is that it does not require significant amounts of investment. Depending upon broker policies, people can begin to buy an ETF with as little as $25. This allows people to begin to familiarize themselves with the investing process without having to tie up a significant amount of their liquid assets.
Although ETF investing is a great way to inject diversification into a growing portfolio, it is also important to buy into an assortment of different ETFs. An ETF may be based on a specific financial sector or may be industry-specific. Others are based out of European or Asian markets, which can benefit the investor who also holds American-based ETFs. If Wall Street’s numbers dip, perhaps the Asian market is coming on strong. The investor who holds both American and Asian ETFs does not need to worry about such fluctuations. Their holdings are bolstered by their diversification.
For consumers new to investing, a good strategy to begin with is making an automatic investment on each payday. The investor can choose an ETF and, either with the assistance of a broker or by themselves online, decide on an amount to invest. Each month the investor can choose a different ETF to buy, spreading their investments in at least half a dozen different funds. Each ETF should be based in a different region of the world or a different industry. They may buy American tech industry stocks and commodities and shares of Asian real estate. There are even ETFs that are tied directly to the gold and silver markets. Essentially, investing in ETFs makes it possible for even new investors to achieve the kind of diversification that used to only be possible for seasoned investors with sizable portfolios.
Like any other type of investing ETF investing requires consistency and discipline. This is why automatic investing is so important. Without any action on the part of the consumer, the investment is automatically made in every pay period. ETF investing is part of a long term financial strategy that can benefit the investor who is saving for their children’s college fund or for their own retirement. By staying in it for the long haul and buying a good mix of ETFs, new investors can achieve solid diversification in just a few months.
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