Money and financial management Part 2 ETFs
ETFs are exchange traded funds and serve as a good basis for any investment portfolio.
What they are exactly and how to buy them, you can find a lot of resources online. This resource is good and this one.
I think the harder part is to figure out what exactly to buy and when to buy.
Timing
From a long-term investor mentality stand point, any point in time is a good time to buy, if you believe that overall economies are growing.
In particular, ETFs replicate an underlying market index such as the DAX or Dow Jones - meaning the ETF fund manager buys the stocks in such amounts that the fund has the same weight and performance as the underlying market/economy.
Buying ETFs that replicate indices
In other words, we should consider buying ETFs that replicate indices of economies we believe to be strong. I believe that Germany will remain a power horse for Europe and have hence invested in an ETF that replicates the DAX.
Spreading risk geographically
Next, we should consider spreading our risk across different geographies and sectors. A really good ETF for that is this ETF that tracks the “world performance” which is essentially a basket of stocks across emerging and developed markets and hence spreads the risk across countries. Mine has done quite well with 57% return over the last 5 years. We can of course also build our geographical spread with buying multiple ETFs from different region (I also hold separate US and China ETFs).
Spreading risk sector-wise
If you work in a particular industry, or believe in certain technologies (ie solar energy), then you should also consider sector ETFs. Generally, it is also good to hold ETFs that replicate stocks in fairly “stable” industries. The logic is simple: Even in a crisis, people have to go buy items in a super market or utilize healthcare products, hence, consumer companies may be a bit more boring when it comes to return but tend to be less volatile.
ETF providers
There are several banks and institutions that build and provide ETFs ie Vanguard, BlackRock that may differ in composition of ETF and fee structure. I typically go for ishares by BlackRock, since I find the way they present the ETF information easy to understand. I typically look at the ETF page and take a really good look at return, geographies and companies invested.
A good way to start with building a portfolio of ETFs is to put a bit of money aside (ie 10k) and start buying 1-2 relatively less volatile ETFs. Next post, we will talk about saving plans and robo investment that are essentially ETF portfolios “on auto-mode” if you don’t want to deal with any of the above :)
Needless to say, I am no financial advisor. Please make your own judgement :)