How to invest one thousand dollars wisely (Part 2 of 3)
Perhaps the most reasonable and reliable tips a novice investor can receive is to simply have moderate expectations when it comes to returns and be content with a market that does not display wild bouts of volatility. Those investors who have considerable money to burn and the willingness to weather the uncertainties and sharp fluctuations can flock to the riskier assets in order to get their fix in both gambling and potential riches. Yet if $1,000 is a great portion of the money you and your family have to play with on the market, it is best to play like the patient and prevailing tortoise and not the sporadic rabbit. Subtlety and a firm grip of reality are key for any investor and are especially vital for a novice one. Pipedreams of grand returns in short time spans were a major factor in driving so many expecting traders into web of Bernie Madoff, and it was also the reason why so many ill-fated investments were placed into the sub-prime mortgage market. Therefore, the following three-part article is a “broad strokes,” simple and most importantly, safe guide of how to invest on a moderate budget that can get you started on your portfolio.
In the first part of the article, we dealt with Mutual Funds and the advantages of having a diversified portfolio without the high risks assembling one individually presents. In this part, we will look another viable option at the hands of modest investors looking to garner long term returns without breaking the bank.
Exchange-Traded Funds or ETF’s are in essence akin to mutual funds. They represent a collection of assets gathered together in order to provide an investor with limited finances with an opportunity to reap the benefits of a diversified portfolio. Assembling a varied portfolio on one’s own increases the risks the funds suffer from exponentially, as each individual investment arrives with its own company and its own set of potential curveballs down the road. Those who invested into Netflix last year present a perfect example. The difference between ETF’s and mutual funds however is the fact that the former are designed to mimic the performance of one specific sector/index. The advantage of making such an investment is that it allows you to make broad bets on the market without going through the tedium of doing exhaustive research on the sector you picked. The risks of investing in individual stocks are thereby mitigated as well.
The amount of ETF’s available to an investor can be overwhelming at times. There are ETF’s that concentrate on commodities futures, currency indexes and countless other sectors and sub-sectors. However, a novice investor should shy away from these specific ETF’s until he/she has a better grasp of the market and the kind of financial goals that the idyllic future would hold.
Broader, index-rooted ETF’s like the SPDR S&P 500 are relatively safe to bet on provided the investment can be stretched over a long enough time frame. The S&P 500 Index has over the past five decades returned 13.5% annually. This compares favourably to the 11.8% yielded by mutual funds. It goes beyond saying of course, that playing the market is by no mean a guarantee of success, no matter how safe the surface-value of an investment may be. Even a period as long as 50 years offers no perpetual sureness of return. A perfect example of a long trend unexpectedly reversing course is the severe way in which home prices tumbled in 2007. Yet reason, history and logic are on the side of an investor betting on the S&P 500 Index to continue to expand.