ETFs Don’t Just Assume You Won’t Time Your Investments
This may be a completely unsuitable investment for someone who is looking for higher returns, or perhaps much higher returns, during this time period. A recommendation like this may even guarantee failure in fact depending on what the objectives are.
The flaw in this is that these methods of determining suitability do not account for the fact that the investor may be seeking to time their entries and exits according to certain strategies and instead assume a passive approach to investing, and actually strongly encourage this.
If that is the approach that is used, if someone just buys into a fund and comes back a year later to see what happened for instance, and expects to achieve a certain result, the volatility of the stock market may indeed have them pretty disappointed. Even bond funds may be too risky for such an approach.
However, not all investors are looking to take a hands off approach to their investments, where time is the only variable that they consider, and the market performance of a fund is not even seen as something that should be accounted for.
There are cases where this may be the right approach for an investor, but this is far from always the case. Today’s investors are gravitating toward playing a more active role with their investments, and while making these decisions does involve some skill, these skills can be developed to the point where they can be preferable to the total hands off approach that is advised by mutual funds generally.
Nowadays, one can actually purchase mutual funds electronically without quite the same level of KYC scrutiny and limitations, but mutual funds aren’t really set up that well to trade anyway, and one even becomes penalized if they trade them more than those involved with the funds prefer, which is very little indeed.
Exchange Traded Funds Do Fully Allow for Investment Timing
When one buys a stock on an exchange, in a self-directed brokerage account, the timing of the trade is of course completely up to the trader or investor. They may buy whatever they want, provided they have the funds in their account, and they may hold it for as little or as long as they wish, as long as they don’t get a margin call.
At best, mutual funds allow you to place trades that don’t get filled right away, as orders only get placed at the end of a trading day. Therefore, you don’t even know what the price you will pay or get will be, and this is not a terribly efficient way to trade.
What if you could execute orders to buy and sell funds immediately, at a known price, which may even include limit orders that will only execute at a specified price? Well this is exactly what ETFs provide you you, the ability to place such trades.
There are still a lot of investors out there who do not wish to become actively involved in their investing strategies, and instead wish to give the entire process over to someone else, in this case those who are recommending mutual funds to them, the dealer or broker.
That may be perfectly fine for this type of investor and we certainly do not want people getting involved in managing their portfolios to an extent beyond what they are comfortable with or may wish.
Mistakes can and are very often made when people tinker with their portfolios, and while the buy and hold strategy is for the most part a defensive strategy, defense is often needed and in many cases keeping investors from harming themselves too much might be the biggest priority.
Many investors do seek to time their trades though, and unless you have a dedicated portfolio manager to make these decisions for you, this all falls upon the individual investor to decide. They may make mistakes, but should they wish to time their investments themselves, they should be afforded the means to do so.
ETFs Really Do Put Individuals in the Driver’s Seat
ETFs do indeed give investors this power, and the timing of their investments can be easily accomplished with the ease of a mouse click, with these decisions not being subject at all to any debate or outside influence.
While this power may be used for good or for bad depending upon the level of skill used by those doing the trading and making these decisions, the ability to wield this power with ultimate ease is seen as very appealing by more and more individual investors as time goes on.
One may seek whatever counsel one wishes in making these trading decisions, and this does not mean that investors will be acting capriciously, although that of course can happen. There are a number of things that one may consider when looking to decide when to enter and exit positions, anything from very short term technical analysis to long term outlooks by industry professionals.
ETFs allow individuals to trade baskets of securities in any time frame they wish, from a few seconds to several decades. Since the advent of electronic trading, we have had this with individual stocks, but now with ETFs being popular, one can do that with groups of securities, indexes, and even actively managed funds now.
Placing Trades To Buy and Sell ETFs
Placing trades to enter and exit positions with exchange traded funds is done the same way as you would with entering and exiting a stock, and all you need to do this is access to a brokerage account. While ETF trades can be placed with any broker, full service brokerages as well as self-directed accounts, many people trade ETFs from their online account and this is the most efficient way to place these trades.
The best thing about placing your own trades online is the reduced costs that are involved, but there are other benefits as well, including having full control over the transaction, and especially with the timeliness of the level of control you have.
ETF orders can be placed at the market, where your order will be filled by your broker at the best available price at the time the order is requested. You can even place a stop loss order on the trade if you wish, just like you would with a stock, where if the price drops below a certain point, a market order to sell will be executed.
While some think that using stop loss orders with ETFs may not be a good idea, and such a strategy is more akin to shorter term trading than longer term investing, this strategy does have its place and does make sense in some circumstances.
While you can’t short ETFs like you can stocks and several other instruments, those who wish to speculate that the underlying assets of an ETF may go down may purchase what are called inverse ETFs, where if the underlying assets decline in value, the value of the inverse ETF will rise, and vice versa.
There are some who think shorting anything is not healthy for the market, but allowing for this does improve market efficiency overall by increasing liquidity, and in any case, this is an option that may be taken advantage of with many types of investments, including stocks, and including ETFs by way of inverse ETFs.
You can’t short a mutual fund though, and your mutual fund can’t ever short anything either, so those who are speculating that markets will decline have to look elsewhere to be able to speculate on this. Often times, markets will be in clear decline phases, and the options for mutual fund holders in these cases are limited to holding them and bearing the decline, or exiting and avoiding some of it.
Placing bets on it going down during these times adds another weapon to your investment arsenal, to not only look to play defense when appropriate but to go on the offense as well at times, and this is certainly one of the biggest advantages that ETFs have over mutual funds for those who are seeking to actively manage their market positions.
ETFs are in many ways a positive evolution over mutual funds, and in several ways allow investors the benefit of diversifying their investments through trading baskets of securities without needing large sized portfolios to do so, while being able to do so directly and in full control of their trades and decision making.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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