Investing in mutual funds or exchange traded funds is a safer way of investing in the markets. You won’t have the opportunity of hitting a home run that can happen when you invest in an individual stock portfolio, but your risk is minimized. These types of funds can target most any sector of the financial markets, the most common are index funds. These funds attempt to mirror the behavior of the particular sector that you choose to invest in.
ETFs have several similarities to mutual funds. Like a Mutual Fund, an ETF is a pool or basket of investments. However, ETF’s many times have lower expenses than a similar mutual fund in that there are no loads (you also have no load mutual funds) and the operating expenses are often lower. Another difference is that an ETF doesn’t trade at the end of the day like a Mutual Fund. The price of the ETF is determined by investor demand at any given time during the trading day. ETF’s are bought and sold like stocks. There is the bid price from buyers and the ask price from sellers.
Just like investing in individual stocks, mutual funds and ETFs carry risk. You won’t have any major catastrophes, an individual stock taking a huge loss, since the risk is spread between a number of stocks. The percentage ownership in each stock in the fund is small, so a big loss in one stock won’t impact your portfolio nearly as much as in an individual stock portfolio. Both types of investing carry market risk.
You will see this chart in a lot of my work, because it is so true. If you have done investing over a number of years, you should recognize many of the feelings associated with market cycles. Owning a mutual fund or an ETF is like buying a sector of the market (in most cases idex funds tied to the markets).The risks of stock ownership may be mitigated, but you still have to be aware of the market cycles.
Here is an example of an ETF, the Vanguard Industrial ETF. You’ll note that the ETF took a large hit in the 2008-2009 market crash, losing over 60% of its value. This bull market has seen the shares increase by 370% since the bottom in 2009.
Throwing caution to the wind is not a trait associated with successful investing. In the past we have had market cycles that tend to top every 8-10 years. We are over 8 years into the current cycle. While this market cycle may continue, it is wise to have an exit strategy.