What is an ETF?
An ETF is a mutual fund traded on major stock markets. An ETF holds assets of stocks or bonds and trades close to its net asset value over the trading day. It means you can buy an ETF at any time during the trading day, unlike a traditional mutual fund where transactions can only be made at the end of the trading day after market closing.
Performance of ETFs vs individual stocks
Don’t be fooled by the relatively low per-stock cost of an ETF – you may lose more money to fees over time with an ETF than if you just purchased each stock separately. As is always true when investing, the key is to look at the long term. Which investments are likely to perform better over a five year or ten year period?
What is the best ETF trading strategy for beginners?
The best way for beginners to trade ETFs is on the long side; buy and hold on to good news and sell on bad news (or even rumours). It means that you should not be selling on bad news or buying on good news because that will lead to losses on no uncertain terms.
What should beginners avoid doing when trading ETFs?
First off, don’t try to time the market by buying low and selling high – trying to time is nearly impossible. Furthermore, if you’re attempting to “buy low”, then you’ll need to wait for a stock price drop which makes the whole process even more difficult than it already is.
Secondly, never invest money you can’t afford to lose. This advice applies generally, but it’s essential with ETFs because of the increased volatility above individual stocks (on average). Only invest what you can lose if your investment decisions end up wrong.
Below is the best ETF trading strategy that beginners can use.
Decide what type of investor you are
There are three different types of investors under the asset allocation framework: Growth, income and preservation. The growth investor, for example, is investing primarily for long-term capital appreciation and aims for outperformance by taking more risk than the other two types of investors using an aggressive strategy. On the other hand, preservation investors invest with less risk and aim to preserve their capital over the short term
Put together your list of do’s & don’ts before you start investing
Before starting your investment journey, form a list of investment dos and don’ts that guide you when making any investment decisions.
Do
- Take advantage of the low-cost index mutual funds offered by your local financial institutions or brokerages. These are meant for novice investors with little capital to invest in passive management, highly transparent, and lower fees.
- Start early, so compounding takes effect in your favour over the long term. The effect is most pronounced with small investments made early on in one’s career; hence it is essential to start investing as soon as possible, even if you only have small amounts available initially.
Don’t
- Don’t invest your money into just one ETF or stock since this is not diversified and exposes you to unnecessary risk.
- Don’t follow the advice of friends or people who are not qualified to give financial advice. It would help if you did your due diligence before making any investment decisions.
Figure out your risk tolerance level
Your finance background will also help determine your comfort level with taking on more risk in exchange for higher returns. If you’re starting, you must familiarize yourself first with the risks associated with investing in different products so as not to lose sleep at night worrying about where your money is at.
Decide whether you want to actively or passively manage your ETFs
ETFs can either be managed actively or passively. Active ETFs require the fund manager to make short-term decisions on allocating capital and managing risk, while passive ETFs follow a predetermined index
In conclusion
The best ETF trading strategy for beginners is long-term, buy-and-hold. If you avoid timing the market and buying/selling on rumours, your ETF trading strategy should go smoothly, provided that you do the proper research beforehand.