How $1,000 Can Open Up Your Portfolio
Still new to the stock market? If you’re looking to open up your portfolio to fresh investment directions, there’s no better place to start then ETFs.
One of the key advantages of exchange-traded funds is that they insulate you from a certain amount of risk. Make a lousy choice and put all your money on one company’s stock, and you’ll feel the effects in a much different way than if you spread that same investment across a sector of companies that represent a kind of commodity or service.
So, if you’re looking to expand your investment portfolio, but you don’t want to attach your money to a single decision, or a single set of decisions, the ETF is a way to buffer your exposure to the unexpected. In this posting we’ll take a look at why that is, and how to pull the trigger on an ETF once you’re ready to dive in.
Growing your portfolio: what ETFs can do for you
Two words: diversity and responsiveness.
- ETFs Diversify Portfolios
Investors hear the word “diversity” a lot when it comes to stock portfolio construction. Heck we even have articles and videos dedicated to the topic. Exchange-traded funds provide a simple way to identify a certain section of the market and then add large parts of that section to their holdings. Want to get into Japanese stocks? Looking for a way to add niche holdings like silver, natural gas, or healthcare to your portfolio? No need to spend weeks researching a ton of companies, instead invest in an ETF.
It all happens in simple, relatively low-cost transactions. You buy a whole portfolio of shares that match the sector in which you’re interested.
- ETFs Allow for Quick Response
There’s another factor at work here as well, and that’s flexibility. While you might be interested in a diverse portfolio as part of your long-term investment plan, keeping the option to get in and out of market sectors with speed may also be part of your plan. ETFs will let you do that.
For example, say you tilt into an ETF that covers biotechnology companies on the Dow Jones index (for more on indexes, see the first post in this series). Then, you see a dip in share prices and a spike in volume that indicates a lot of selling in that sector. Things are shakier than you like. With other kinds of funds, you’d have to wait until the close of the trading day to unload your shares. With an ETF, you can buy and sell pretty close to immediately, and so you’re in a flexible place to make quick-response moves according to your own investment sense.
First moves: buying into ETFs
So, you think exchange-traded funds sound like a good idea? Here’s how to buy them in three steps.
- Identify Candidate ETFs: Google can help you ID a handful of exchange-traded funds right off. Key phrases can range from “solar energy etf” to “gold etf” and “emerging markets etf”. You can also check out the Wall Street Survivor ETF Center
- Check the Contents: While you’ve saved yourself a lot of research by identifying an ETF that covers a type of stock, don’t go in blind. As ETFs have gained popularity, some of the labels that get applied to them can suggest something slightly different than what the fund actually contains. So, once you’ve identified several ETFs that match the sector in which you’re looking to invest, look under the hood. Make sure the stocks really match the title of the collection.
- Place your trade!
A pair of final tips: you can buy an ETF at pretty much any amount you like, but some funds (like Vanguard) will require you to meet a minimum order (typically a couple thousand dollars).
In our next instalment of this Wall Street Survivor series on ETFs, we’ll look at strategies to help you build upon these basics.