ETFs can form an integral part of a balanced portfolio, and the number of traders buying ETFs have risen over the past 12 months, as individual stock picking has become that much more difficult.
When you are considering buying ETFs as a beginner, you will want a simple set of steps to follow and act as your guide. Having a predefined set of rules can help you ensure that you are comparing ETFs for trading consistently, and without any unconscious bias.
Here are our Top 10 tips for buying ETFs
1. Do your research
Before investing in an ETF, it is important to do your research and understand what you’re buying. Make sure to read the prospectus and other materials provided by the issuer, and consult with a financial advisor if necessary.
2. Consider your investment goals
When considering which ETF to invest in, make sure to align your investment goals with the fund’s objectives. For example, if you’re looking to generate income, you’ll want to choose an ETF that focuses on dividend-paying stocks or bonds. On the other hand, if you’re looking to grow your capital, you’ll want to choose an ETF with a more growth-oriented strategy.
3. Evaluate the fees involved
ETFs typically charge lower fees than traditional mutual funds, but there are still fees involved. When comparing ETFs, be sure to take into account the management expense ratio (MER), which is the annual fee charged by the fund. The lower the MER, the more efficient the fund is and the better it is for investors.
4. Consider the liquidity
Another important factor to consider when investing in ETFs is liquidity. Some ETFs trade infrequently and can be difficult to sell, so make sure you’re comfortable with the liquidity of the fund before investing. The higher the level of liquidity and trading volume of a particular ETF, the easier it will be for you to both enter and exit positions, at reasonable speeds and prices.
5. Use limit orders
When selling or buying ETFs, it’s important to use limit orders rather than market orders. A limit order allows you to set the price at which you’re willing to buy or sell the ETF, whereas a market order will execute the trade at the current market price, which may not be ideal.
6. Diversify your portfolio
ETFs can be a great way to diversify your portfolio and reduce risk. By investing in a variety of different ETFs, you’ll be less likely to experience losses if one particular fund underperforms.
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7. Stay disciplined
When buying ETFs, it’s important to stay disciplined and stick to your investment plan. Don’t let emotions get in the way of your decision-making, and don’t chase after hot trends. Remember that successful investing is all about staying the course and sticking to your long-term goals.
8. Review your holdings regularly
ETFs can change over time, so it’s important to review your holdings on a regular basis and make sure they still align with your investment goals. If an ETF has changed in a way that no longer meets your needs, don’t be afraid to sell it and invest in something else.
9. Use stop-loss orders
When trading ETFs, it’s a good idea to use stop-loss orders to limit your losses. A stop-loss order is an order to sell an asset when it reaches a certain price, and it can help you protect yourself from big losses if the market turns against you.
10. Have realistic expectations
Investing in ETFs can be a great way to build your wealth over time, but it’s important to have realistic expectations. Don’t expect to get rich quick, and don’t expect every trade to be a winner. If you’re patient and disciplined, however, investing in ETFs can be a great way to reach your financial goals.
Buying ETFs Summary
Before embarking on buying ETFs, ensure that you have a solid base understanding of ETF trading in general and how the markets operate. Once you are up to speed with your knowledge, you can begin to set yourself some clear guidelines, or a plan for your ETF investments.
We adhere to a policy of research, evaluation, and review, that holds true across most of our investing plans, and ETFs remain broadly similar. Using specific order types, keeping risk levels in check, and having realistic expectations over what you will likely see in ETFs are also key points that will stand you in good stead as you continue to build out your ETF portfolio.