The instant diversification of ETFs and why they are better than individual stocks.
Buying individual stocks has its merits and plenty of proponents. But buying individual stocks requires spending time doing “homework”, employing fundamental and/or technical analysis to find the right investment.
And owning just one stock isn’t enough. One of the number one rules of investing is diversification. Being diversified is a critical component of risk management and helps to protect against losses due to investments being too concentrated.
For the individual investor, this typically means owning 5, 10, or more stocks that each are diversified into different industrial segments to help protect a portfolio from the problems associated with concentrating assets into too few stocks.
Imagine multiplying the “homework” required to manage a single stock across an entire portfolio of 10 or more stocks. It is easy to understand how an investor can easily spend an hour each night pouring through news, charts, reports, and more to try and figure out the right moves for one’s portfolio.
An ETF contrasts with buying individual stocks in a myriad of ways. In particular an ETF is an instantly diversified basket of stocks, so when you buy an ETF you own far more than just one stock.
For example the SPY (pictured to the left) is an ETF that tracks the S&P 500. It is comprised of 500 of the biggest corporations that represent all major industrial sectors.
Investing in an ETF such as the SPY offers another advantage – it is far less costly to buy the ETF than it would be to try and manage a portfolio composed of those 500 individual corporations.
ETFs are an efficient way to put one’s investing dollars to work and allow one to take a step back and analyze the entire market and economy from a “big picture” perspective. This is quite different from the individual that’s worried about the next quarterly report from their particular stock “pick.”
At Summerland Associates, our alerts are targeted to three different ETFs that track Gold Miners, the S&P 500, and U.S. Treasuries. These offer our members the ability to invest in a huge variety of stocks while also providing ease of management. This renders stock picking unnecessary for the purposes of this approach!
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Back | Course 3: Investing in different economic cycles and how that dramatically impacts portfolio management.
