When In Doubt, Get the ETF Out

Today is Tuesday, November 24 and since Election Day, the stock market has been on what seems like a non-stop ride upward. Of course this is great news for those individuals who already have money in the market. But what about those on the sidelines who are watching their friends make boatloads of money?

Market gurus like CNBC's Jim Cramer suggest not to invest in Exchange Traded Funds, commonly referred to as ETF's. While I tend to agree with this theory, part of me thinks back to the tech bubble when everything was going higher. I didn't understand stocks back then, so I just bought whatever was being talked about in the financial news. This worked for a while, but when the bubble burst, so did my portfolio.

If you have the time to spend researching individual stocks, then I think Cramer's approach makes a lot of sense. Find the best of breed and invest in those for the long-term. However, if you can't put in the hours, then an ETF may be a better approach for your investment needs. ETFs range from industry specific (retail, healthcare, financial) to broader index-wide funds like Vanguard's S&P 500 fund (VOO).

When you purchase an ETF, you are purchasing a basket of stocks. The advantage to this is that if one stock goes down, it doesn't necessarily bring the entire ETF down with it, unless that particular stock is one of the top holdings in the portfolio. Let's say you own a specific stock outright and it drops 10%, your portfolio will take a beating. But, if you own that stock in an ETF, the pain won't be as bad.

That being said, if you are looking to get rich quick, then an ETF may not be your ideal investment. These are made for people with a long-term time horizon or want a bit more stability in their portfolio. You will not see the wild swings you see in momentum names like Tesla, Peloton or Square, but depending on your mindset, this could be a good thing.

I suggest researching ETFs before investing. Each contain different holdings and have different expense ratios, so consult an investment advisor prior to purchase if you don't understand the structure of the fund.

Happy Investing!

13 views0 comments

Recent Posts

See All