ETF is surely a good lazy man's tool for investing. Because we can't know everything about all the companies, it makes sense to go invest in ETFs for diversification. But is it definitely a better way? It might be for some people who have absolutely no idea about the companies. But I'd recommend them not to invest in stocks at all. Warren Buffett only invests in companies he understands. That is the reason that he never invested in Tech stocks until he finally did in IBM recently. It is hard to beat the market on an average by stock picking. So it is not a surety that even after investing hours and hours into doing research you will be able to outperform the market. So, we can agree that some of the Mutual Funds and ETFs provide a good solution if one just wants to mimic market performance. It saves a lot of time. However, now that there are thousands of ETFs to pick from, selecting an ETF to invest in itself would be quite a task.
The other big advantage of being able to invest in ETFs is that we can get exposures to markets that we can't easily get knowledge about. Let's say the Spanish stocks have been beaten down badly recently and we want to get some exposure to the upside there, it would take a lot of time to research and pick stocks in Spain, not to mention it won't be easy to beat the market without enough research. For this scenario a Spanish stocks large cap ETF might be a perfect solution.
Now that we agree that there are some definite advantages to investing in ETFs, I want to answer why I haven't invested in ETFs yet. Firstly, I have started to feel that a correction is now due and I don't want to put money into ETFs only to find myself go through the whole correction and recovery cycle again. I'd rather hold cash. Secondly, I'm looking at only income generating stocks for my portfolio. While ETFs are well diversified, when I research on their holdings I usually find some low yielding stocks in there that I don't necessarily like to hold. If I invest I would be forced to hold them even when I don't like it. I want to have more control there.
If the valuations do become more attractive in the market and I decide to invest, I'd be doing that in installments over a period of time. I do not recommend investing lumpsum amounts into the market. If you do a historical analysis when investing lumpsum your return over the years depends heavily on the valuation you invested in. I'd divide my amount into equal small parts and invest them each month into ETFs. Some do believe that the market is not fully valued yet and there is still some upside. If you want to invest now, do follow this method to average out the price over a period of time and avoid buying a big chunk at the peak levels.
The other big advantage of being able to invest in ETFs is that we can get exposures to markets that we can't easily get knowledge about. Let's say the Spanish stocks have been beaten down badly recently and we want to get some exposure to the upside there, it would take a lot of time to research and pick stocks in Spain, not to mention it won't be easy to beat the market without enough research. For this scenario a Spanish stocks large cap ETF might be a perfect solution.
Now that we agree that there are some definite advantages to investing in ETFs, I want to answer why I haven't invested in ETFs yet. Firstly, I have started to feel that a correction is now due and I don't want to put money into ETFs only to find myself go through the whole correction and recovery cycle again. I'd rather hold cash. Secondly, I'm looking at only income generating stocks for my portfolio. While ETFs are well diversified, when I research on their holdings I usually find some low yielding stocks in there that I don't necessarily like to hold. If I invest I would be forced to hold them even when I don't like it. I want to have more control there.
If the valuations do become more attractive in the market and I decide to invest, I'd be doing that in installments over a period of time. I do not recommend investing lumpsum amounts into the market. If you do a historical analysis when investing lumpsum your return over the years depends heavily on the valuation you invested in. I'd divide my amount into equal small parts and invest them each month into ETFs. Some do believe that the market is not fully valued yet and there is still some upside. If you want to invest now, do follow this method to average out the price over a period of time and avoid buying a big chunk at the peak levels.
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