When you first start investing your money, it may be hard to figure out what to put your money in. If you don’t want to put in substantial time to learn investing and to research individual stocks, exchange-traded funds (ETFs) are an extremely easy way to get started. When you purchase a share of an ETF, you are purchasing a basket of stocks that tracks an index. Unlike mutual funds, they are generally not actively managed, which keeps fees down.
For my current portfolio, I love investing in ETFs. Since I have a full-time job and need to work on my blog, it leaves little time for me to research potential stocks, dig into financial details, and monitor a group of holdings. Therefore, ETFs are the perfect way for me to invest in the markets using minimal time and effort while reaping all the benefits.
Here are my top reasons to purchase ETFs.
By investing in a basket of stocks, you are automatically diversifying your holdings. Whether you invest in a general S&P 500 fund, a technology sector fund, or a large cap value fund, you are spreading your money across a variety of companies. If you put all your money into one company, what happens if that company performs poorly?
Investing in an exchange-traded fund requires a lot less research than investing in individual stocks. You don’t need to understand all the balance sheet items or cash flow statements of specific companies. You don’t need to constantly search the internet for the latest news or figure out patterns behind stock price movements. You just need to understand the general theme and macroeconomic environment of the fund. Even easier, you don’t even need to do much research if you invest in a general S&P 500 fund such as SPY, IVV, or VOO since they track the overall market.
As long as you stay with ETFs that have low expense ratios, you’ll avoid all the management fees that come with mutual funds. I recommend Vanguard ETFs since their expense ratios are generally low. ETFs charge approximately 0.43% on average whereas mutual funds charge 1.25% on average. In other words, mutual funds charge about 3X the amount for active management. You’re losing over 1% of your portfolio to fees. In bad years, your portfolio may not even return 1%. 86% of large cap fund managers fail to beat the market. Why pay more for inferior performance?
According to Warren Buffett, possibly the greatest investor of all time, “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.” Remember, consistently investing in high-quality stocks is one of the tried-and-true ways of building wealth.
If you are truly interested in investing in ETFs, you can either open up a new brokerage account, utilize an existing brokerage account, or use a tax-advantaged retirement account. Simply look up the ticker for the ETF as you would for any stock, and purchase it like any other stock. Here are my favorite ETFs.
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