Hey Savvy Savages! We have an awesome guest post today from Dan Kent the co-founder over at Stocktrades.ca. Dan has been a DIY investor for 7 years now. He a combination of dividend, growth and real estate investments in his portfolio and he is always looking to continually grow his net worth. You can follow him on Twitter at Stocktrades_CA.
If you already manage your own investments, you’ve already taken the first step towards putting more money into the pocket that matters, yours.
Congratulations. It’s a daunting task that many do not succeed with due to a lack of experience in the markets or simply a lack of time. Instead, these investors end up running back to their bank or advisor with their tail between their legs and gladly let them dig into their wallets once again.
What if there was a way to reduce your risk, diversify your portfolio, and increase your returns all while keeping those pesky management fees in your own pocket?
The answer to that question is there will never truly be a cut and dry form of investing that works for everybody, but for most, the ETF will do just fine.
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What Is An Exchange Traded Fund?
If you’ve been dabbling in self-directed investment already, I would bet that you are individually picking your stocks. It’s what I do, and it is still what I do to this day.
Naturally, when we think of making our own investments in the stock market, we think of buying just that, stocks. But with the acceleration of the ETF, and by acceleration I mean absolute explosion, we can significantly reduce our exposure to volatility as well as reduce the amount of time we spend analyzing individual stocks.
Now, I’m not saying that if you are an individual stock picker you should sell all your positions and start checking out ETFs. The reasoning? The same reason I don’t, I love analyzing stocks. If checking up on your investments with individual companies is more a hobby than a burden, then keep at it.
As long as you know what you’re doing and are feeling totally comfortable.
For others who don’t have the time to waste picking individual stocks, or simply have no idea what they are doing, an ETF can take some of the load off your back. An ETF is a “bundle” of securities. By securities, I mean anything from stocks, bonds, commodities, real estate, and much more.
How Can An ETF Help Me?
An ETF can provide an investor with exposure to a whole industry in a single click. This provides the investor, beginners especially an easier route to placing their money in an industry or sector that they think is going to be profitable.
For example, if you want exposure to the Canadian cannabis sector, you may look to purchase a stock like Aurora or Canopy Growth Corporation. However, the Canadian cannabis industry is in its infancy, and although we know who will probably be the front-runners come legalization, it is far from a sure bet.
With an ETF like Marijuana Life Sciences Index (HMMJ) you can gain exposure to the industry as a whole, all bundled up into one simple purchase.
If you purchase Canopy, and they fail to meet expectations or another company takes control of the market such as Aurora, you will probably be kicking yourself for making the wrong purchase. If you purchase an ETF like HMMJ, your exposure to the whole industry will likely make up for Canopy’s shortcomings.
Why Shouldn’t I Just Stick With My Bank?
Unlike mutual funds, which is more than likely what your bank or advisor is investing your cash in, ETFs trade like stocks.
The price fluctuates throughout the day and you are free to buy and sell as many times as you wish.
With a mutual fund, there are often penalties for early withdrawal, and the price only changes at the end of the trading day.
With a mutual fund, expense ratios often exceed 2%, which is the total percentage of your portfolio that they take every year to operate the fund. A mutual fund has analysts, commission costs, and generally a larger overhead than an ETF.
Passively managed ETFs often have expense ratios of under 0.5%. Considering the average return of the stock market is around 7 percent, you can see how this can add up. A 2% mutual fund will eat away almost 30% of your return, while an ETF will only take 7%.
Over the course of your life, these differences in fees can have an astronomical impact on your retirement fund.
What If I Am Not Comfortable Even Picking ETFs?
Companies have caught on to the popularity of ETFs, and have reacted swiftly. In 2008, the first robo-advisor came alive.
A robo-advisor is essentially an automated process in which your money is placed into an account and invested for you. The program doesn’t just blindly take your money and throw it into whatever ETF it feels like. More often than not, these advisors will have an initial questionnaire to figure out your tolerance for risk and the returns you are looking to get.
If you aren’t comfortable at all with making your own investment decisions but want to get away from paying high management fees, a robo-advisor is almost a no-brainer.
Like I said above, I don’t invest in them myself, as I consider security analysis a hobby. But with our most recent Wealthsimple review, I decided to open an account and check them out. Wealthsimple is bar none the best robo-advisor you can partner up within Canada, and they are currently heading into the American market full steam ahead.
In The End, Is Switching Really Necessary?
Getting ahead in today’s world is all about adapting and changing. The world is changing right now when it comes to people’s investments.
Investors allocating their funds into mutual funds are falling, while ETFs are rising at an incredible rate. You’ll thank yourself in retirement for actively doing something about it now.
That being said, you have to weigh your options. There are some incredible mutual funds out there that even after fees paid would still provide you with a better return than an ETF. Like I stated at the start of the article, nothing is cut and dry when it comes to investments.
You really have to sit down and figure out what is best for you. Check out the numbers you currently have such as management expenses, and growth for your investments. Then weigh them against a few ETFs that you might hypothetically be interested in just to see.
Best wishes to you & happy investing!
BONUS: What is an ETF Infographic from Mint
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