Looking for an investing edge? Try lowering your costs. Beat the stock market professionals at their own game through low cost ETF investing. Despite the cold weather and frigid water temperatures, jump in and join the investing wave. Adopt a low cost ETF investing approach and you may improve your returns and your personal bottom line.
For more on Investing on a Shoe String with Low Cost ETFs, check out this post by Tom Lydon on ETF Trends.
Exchange Traded Funds, commonly referred to as ETFs, are part of a class of investment products known as Exchange Traded Products of ETPs. These products have revolutionized the investing landscape since being introduced in the 1990s and becoming more widely available to individual investors. And as they become more widely adopted they offer investors the benefits of broader diversification, lower investing cost and the flexibility to develop portfolios that are tailored to an individual’s precise needs, risk tolerance and time frame.
While mutual funds are still the predominate way that individuals still invest in the stock and bond markets, ETFs and ETPs are rapidly becoming more available on low cost brokerage platforms, 401(k) plans and through Registered Investment Advisers. Although the lion’s share of investing is still done in the more than 10,000 different mutual funds, these products have grown from a handful at the beginning of the 1990s to more than 1,400 funds with nearly $1.3 Trillion invested in the US alone.
What makes these low cost investment vehicles a powerful development for individuals is the way that they make it possible for individuals or their investment advisers to build portfolios tailored more precisely.
Active versus Passive Investment Management
Often there’s a debate about whether active management or passive index-style investing is better. Regardless of what you believe about which approach is better, the bottom line is that ETFs can help with either and with more flexibility at a lower overall cost compared to most every other alternative.
I think that both have merits. Just like in some seasons it makes sense to wear Bermuda shorts and at other times (like today in the frigid Northeast ) it’s much better to be wearing a couple of sweaters, each investment style makes sense for its own reason. More often than not, passive investing beats out those who are trying to actively do better than a benchmark. But there is no denying that some managers have skill and show it in their benchmark-beating returns.
And while in the long run “Buy and Hold” works, there’s no denying that for some (like a retiree) it will take too long to recover. So it is just so much easier to avoid the losses in the first place so you don’t have to waste time recovering.
Turtle vs. the Hare
This debate is similar to the children’s story about the turtle versus the hare. In the story the hare was off the line first and was faster with a commanding lead over the turtle. Then the hare got a little too confident and decided to take a nap losing his lead and eventually the race to the slow, steady turtle.
This is just like investing and the debate could be framed in these terms: active management (hare) versus passive management (the turtle).
Turtle and the Hare as a Team
But imagine if the two combined to work together. The hare carries the turtle and then at other times the turtle carried the hare. This is what I mean when I write about the approach I use in my MarketFlex portfolios: Strategic Asset Allocation combined with Tactical trading. This uses a core of passive index-style ETFs allocated based on a client’s risk, age, and time frame. Then there are other ETF, stock, or mutual fund positions added around the core that are more actively traded to take advantage of market conditions.
Low Cost ETFs Offer Better Approach
Look, we all want to win when we step up to play any game. Investing is no different. Since there are few things you can control in life and investing, the best you can do is control what you can. What you can control are costs and emotions.
With ETFs, you can access every imaginable sector, asset class, region or style. And they can come in every flavor of investment strategy, approach or style as well: passive or active. And you can do it at a fraction of the cost of a mutual fund. The average plain vanilla ETF typically costs less than 0.20%. The average mutual fund publishes an expense ration of about 1% and the more active funds can be closer to 1.5%. On top of this there are trading fees for mutual funds that can range from 0.25% to 0.50% of assets.
Do the math: the ETFs can cost considerably less. And with several platforms that offer dirt cheap trading or flat rate (0.20%) trading they offer a big cost advantage. And every dollar saved is another dollar in your pocket.
So regardless of the investing approach that you or your investment adviser uses, be sure to check out ETFs and see if they will work for you.
