Advice for the first-time ETF buyer
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If you’re an investor just getting started with exchanged-traded funds, or ETFs, the experience can be overwhelming due to the sheer number of choices. According to Morningstar, there are now more than 3,000 ETFs available in the U.S. alone. If you’re a first-time ETF buyer, here's some expert advice for you.
Keep things simple
Vanguard spokesperson Michael Nolan suggested looking for broadly diversified ETFs that cover major asset classes like Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market Index Fund.
|VTI||VANGUARD INDEX FUNDS VANGUARD TOTAL STK MKT ETF||190.65||+2.03||+1.08%|
|VXUS||VANGUARD STAR FD TOTAL INTL STOCK INDEX FD E||51.59||-0.02||-0.04%|
|BND||VANGUARD BOND INDEX FUNDS TOTAL BOND MARKET ETF||75.71||+0.60||+0.80%|
Focus on costs
Costs are one of the few things investors can directly control, said Nolan, and the lower the cost of your investments, the more of your returns that you keep.
"As Vanguard founder John C. Bogle often said, ‘When it comes to investing, you don't get what you pay for; you get exactly what you don’t pay for,’" said Nolan.
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Think long term
When building your investment portfolio, especially with regard to stocks, Nolan said you should be thinking in decades, not months or even years.
"Bull and bear market cycles can play out over long periods of time, and you’ll need to stay invested throughout the ups and downs of the markets to meet your long-term investment goals," he said.
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Understand your risk tolerance
Eric Wiegand, a senior portfolio manager at U.S. Bank, explained that buyers of ETFs can purchase an ETF through a traditional broker, a discount broker or by going directly to a large ETF provider.
"While these options allow investors to customize to their particular desires, it is important that the first-time investor understand their risk tolerance," he said.
Wiegand suggested asking yourself these questions: Can I afford a decline in value of 10, 20 or even 30 percent? What is your investment horizon?
"If they need to utilize the funds soon, they should emphasize lower-risk investments, while someone who is just starting their career and is looking to save for retirement 30-40 years away may want to accept more volatility for the long-term appreciation opportunity," he added.
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Pick an ETF that fits your overall investment strategy
For any first-time investors or those who are looking to diversify their investment portfolios, ETFs can be a great place to start, said Leanna Devinney, vice president and branch leader at Fidelity Investments.
"ETFs track an index and can allow investors to build a well-balanced strategic asset allocation," she said.
With a variety of options, Devinney said it’s important to determine which ETF best fits your overall strategy by considering your comfort with risk and the time frame for your investments.
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"Generally, you can afford to take more risks with your investments when you’re younger, while as the older you get and nearing retirement you may be less interested in growth potential and more concerned about protecting the value of your portfolio," she stated. "Once you determine your risk level and the right mix of stocks, bonds, and cash, you should be able to identify the ETFs that are right for you and your financial goals."
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