Stock market corrections have been happening for ages. Trying to predict market bottom is a useless exercise. Historical scenarios and models can be deceiving. Keep an eye on the bigger picture. Are we going in a recession where market may enter bear market or is it a mid correction for an overheated market?
Bear market is defined as stock market going down by 20% or higher. Corrections is defined as stock market going down by 5% to 10%.
Recessionary corrections are usually steeper and last longer. Whereas corrections that occur in healthy market are usually shallower and shorter. Of course, the tricky part is predicting are we heading into recession or not.
We wish we would have a magic lamp to predict market top and bottom, but we don’t. Though stock market has gone up over a long time period, some people panic during market downturn and sells at the wrong time. We have no control over the market direction. The only thing we can control is our response to such events.
Have a proper stock and bond allocation based on your risk tolerance. The rule of thumb is to put 60% in stocks and 40% in bonds and perform annual rebalancing. Talk to your financial advisor to have appropriate allocation and stay the course.
Both Mutual funds and ETFs are basket of individual stocks, however, ETFs are actually a hybrid between mutual funds and stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.
As both Mutual Funds and ETFs are basket of individual stocks or bonds, they are overall considered safer investments than individual entities. There really is no substantial difference between the two if you are investing for long-term time frame. However, there are some fundamental differences between the two as noted below.
Trading Time
ETF can be bought or sold at any time while stock market is open. If you are looking for a precise entry and exit time-point then ETF are better than mutual funds which can only be traded after stock market closes.
Fluctuating Price
ETF prices fluctuates throughout the time stock market is open. If you are looking for a precise entry and exit price-point then ETF are better than mutual funds which can only be traded after stock market closes.
Choice Flexibility
Mutual Funds have much longer history and provide lot more choices to invest than ETFs. However, ETFs are becoming increasing popular lately.
Fees Impact
ETFs generally have lower management fees compared to mutual funds. A small difference in fees can have huge impact for those investing for long-term time horizon.
Periodic Returns
Mutual funds generally provide returns (profit) in the form of capital gains and dividends. ETF on the other hand provide returns mainly on dividends.
Tax Implications
ETFs are considered more tax efficient than Mutual funds. Mutual funds generally have more transactions (buying and selling shares) that may result in capital gains that are taxable, even for those who may not have performed such transactions. Thus it is preferable to invest in ETFs in a taxable account and Mutual funds in tax-friendly accounts like 401k, IRA and Roth IRA.
Advance Trading Techniques
ETFs can be purchased on margin or sold short. These are advanced trading techniques that have unique risks and thus are not recommended for beginners.
Final Verdict
Though both Mutual Funds and ETFs investment is considered safer than individual company stock or bond investment, there are fine differences between the two. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
We hope the information in this post will be helpful in your journey of aspiring nirvana!
An Exchange-traded Fund (ETF) allows you to invest in a basket of individual stocks or bonds with relatively lower risk.
What is an Exchange-traded Funds (ETF)
An Exchange-traded Fund (ETF) is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys an ETF share, that money in invested in stocks or bonds held within the ETF.
Why should I invest in ETF
ETFs provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the ETF based on a specific goal.
How can I buy ETF?
The easiest way to buy ETF is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what ETF you are interested, buy and hold them, and sell as per your financial needs.
What are different types of ETFs
There are multiple types of ETF, each designed to meet a specific investment goal:
Stock ETFs – Invest in company stocks from certain industry, country, or region.
Bond ETFs – Invest in bonds from corporation, government or municipality.
What are the advantages of ETFs
Advantages in investing in ETFs are:
Convenience – You can buy or sell ETFs any time during the day on stock exchange
Diversification – You hold a variety of stocks/bonds at a lower risk and cost than individual ones
Professional Management – A professional team will manage individual stocks/bonds within the ETF
What are the disadvantages of ETFs
Bear in mind that you will be paying a fee to the professional team to manage ETF. This fee will impact the overall return of your investment. Additionally, you will have no control over the individual stocks or bonds within the ETF. Remember, ETFs are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.
How do I manage risk of investing in ETFs
There are multiple options to lower risk of ETF investing:
Buy Index-based ETFs that tracks an index (Ex. S&P 500)
Buy ETFs of an industry or country with which you are familiar
Employ Dollar Cost Averaging, that involves buying ETFs with a fixed dollar amount each month
What is the difference between ETF and Mutual Fund
Exchange-traded funds (ETFs) are a hybrid between mutual funds and company stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.
Final Verdict
Though ETFs investment is considered safer than individual company stock or bond investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
We hope the information in this post will be helpful in your journey of aspiring nirvana!
