Another type of investments beside stocks is Exchange Traded Funds or ETFs. Basically some investment companies buy several shares of stocks and group them together in categories; for example, they buy stocks for Microsoft, Apple, Google, Cisco, Intel… You get the idea, what do you think this category is? If you guessed information technology you guessed right, by buying the ETF instead of the stocks themselves you minimize the risk of loosing money while you are exposed to several successful companies. There is a tradeoff though, you are not buying individual stocks so if apple stock skyrockets your ETF may just increase by a tiny bit. In the same token, if Cisco goes out of business you will see the value of your ETF decrease just a tiny bit (instead of loosing all your money).
Diversification is Key
So why are we better off buying ETFs than individual Stocks? Buying ETFs provide diversification and simplification, these two elements help you achieve your goal of becoming rich while achieving certain security of asset conservation. What I mean is that ETFs provide instruments that minimize the risk while providing a good chance of financial gains. You will not loose your money but you will also not become rich fast; It will take time but eventually it will work out.
Mutual Funds Vs ETFs
Mutual funds are very similar to ETFs; some companies buy stocks, combine them together and sell the collection of stocks. The difference between them is that the price of mutual funds are directly related to the percentages and costs of the underlying stocks while ETFs prices depend on how many people buys them. It is like buying the stocks in advance and then selling a combined share (Mutual fund) as opposed to first getting the money and then buying (or selling) the stocks depending on the money that came in. Since Mutual funds depend on the money coming in first and then buying the shares of stocks they don’t operate when the market is open, they exchange shares just when the market closes. the liquidity therefore is the end of the trading day (or 1 day liquidity). ETFs have immediate liquidity but loosely correlate to the underlying stocks in the very short therm but correlate strongly on the long term.
The main point to consider if buying ETFs or Mutual funds is the underlying stocks, given that you have a same stock portfolio in both an ETF and a Mutual fund just buy the ETF as liquidity is better.
So how exactly do you buy ETFs?
ETFs are bought exactly the same as stocks, just find the ticker and place a trade to buy some shares. If some of the stocks pay a dividend then the combination of the dividends is paid quarterly. I name below the ETFs that I invest on, these are just ideas and you may want to consider others. I like aggressive growth which is not recommended for a conservative investor, have that in mind when considering investing in some of the ETFs below.
- VGT: Invests in Information technology companies (Apple, Microsoft, Intel, Cisco, etc.)
- VUG: Invests in Growth stocks (Microsoft, Apple, Amazon, Facebook, etc.)
- VPU: Invests in Utilities (Duke, Cheapstake, PG&E, etc). This is moderate risk and pays dividend, this ETF is like my emergency fund ETF.
- VOO: Invests in the S&P stocks which are the 500 biggest companies in the stock market.
- VTI: Invest in absolutely all the companies that form the US stock market.
I don’t invest in bonds ETFs, I prefer to just have cash because in my 20 years of investing experience, bonds have always been a bad player. This is just my opinion, your situation may be different.
I also don’t invest in international stocks, I have not experience any situation where international stocks perform better than the US. I trust the US stock market and kind of understand it. I also have lived in several other countries and understand how hard is to make money elsewhere. I prefer to stick with has worked for me for a very long time. I did invest international and bonds in the past and they underperformed really badly so I decided to stop following the advice of everyone and think for myself. Maybe I am wrong, only time will tell.