Many people who would otherwise be investing in stocks and profiting from the stock market are put off because they consider it a big risk. But is that always true?
If investing in the stock market is so risky then how does anyone make money? And is there some kind of investment or strategy that can prevent necessary risks and generate a safe return?
Those who are risk-averse but would still like to share in the profits being generated by the market as a whole, should strongly consider investing in a good ETF investment.
An ETF stands for an exchange traded fund and the way it works is very simple.
Effectively what an ETF is and does is buys a huge range of companies diversified through just about every sector and industry in existence.
For example a very popular type of ETF investment is one that tracks a particular index. An index is simply a set of companies that are being ranked by certain metrics.
The most popular of these is the S&P500 which simply tracks the top 500 US companies in an index. This means that contained in this index are all the largest companies in America by market cap.
Think of just about any company which is a household name in America from Home Depot to Cisco and they are all found in the S&P500.
Now what an exchange traded fund does is it takes an index, in this case the S&P500, and it buys stocks for you in the same amount between all of these companies.
Now while it’s true there is certainly risk associated to buying individual stocks. For example buying stock just on Facebook may seem like a good idea however if you watch the news you will know Facebook is down a lot this year. So actually buying stock in a single company like that is not recommended.
However when you track an index through time, like the S&P500, while it will have some years where it makes a loss, overall the returns keep going up on average.
So for example if you bought in to the entire index back in 2008 with an ETF investment, you would have made many times over your original investment. Had you also compounded your returns then you would be very rich indeed, and even off just a small investment.
This is because while the market cycles are boom and bust, the overall trajectory of the markets is onwards and upwards.
So great, should I run out and buy an ETF right now?
Hold your horses there because while yes an ETF is a great investment to add to a diversified portfolio, it is also something that should be bought at the right time so as to ensure you get the best returns on your investment.
For example right now stocks are trading at an all time high and just beginning to drop in value.
You see when a market has been on a Bull run, which means a market which has been going up and up, after a while stocks will become over valued. They no longer represent fair value for the business that you are buying a small share of.
When this happens it shows that we are reaching the end of a market cycle and the bust part of the ‘boom and bust’ is upon us. It’s also the reason why top investors are mostly sitting out of investing in stocks at this time and only holding on to their longs, like Apple and Amazon.
Investors want to see what happens with the market because all the signs spell trouble in the stock market at this current time.
However this can actually work in your favor, and let me explain how.
If you are new to investing and just starting out then this is a very good time for you to do a few key things, namely:
This is a great time for you to invest in your financial education, learn the markets, understand how to value a stock, really know what you are buying when you invest in stocks.
This is paramount yet so many miss this because they are so eager to simply jump right in and start buying shares that they do not know what they are buying.
Many in fact look at the stock market in the same way as a gambler looks at a casino, and this spells trouble. Not you though because you know that to successfully buy stocks low and sell them high at a profit, you must first know the intrinsic value of the stock you are buying.
From there is gets easier because knowing what the shares are worth, ensuring you have set a comfortable margin of safety, and then buying cheap undervalued stocks of good businesses, – you can now wait for the market to correct itself and earn a profit for your diligence.
So whether you are investing in individual value stocks, some growth stocks, or an ETF investment as we are talking about, doing your homework and research is always a good idea and leads us to step 2.
Okay so now you understand stocks and are interested in buying a safe ETF investment for your portfolio. You understand that this type of investment buys a huge range of stocks on your behalf and allows you to profit from the overall growth of companies as a whole.
You have done your learning and understand the risks and benefits of investing in the stock market and you have prepared yourself psychologically for the stress of trading and investing.
What’s more you know about market cycles and when to buy.
Knowing this and watching the market you will find the right time to buy in so you can dramatically increase your chances of profiting and substantially reduce your risks.
The best time to buy an ETF is when the entire market is in a downturn. For example the best time to invest would have been in 2008 after the economic crisis and global recession.
Stocks in the US and all over the world were trading at very low prices relative to the actual true value of the businesses they represent. Buying stocks when they are low and selling them when they are high is of course the way to make money with your investments.
And so we are waiting – while we continue to learn – for the stock market to crash. Or at very least drop down to trading at fairer value.
This is when we invest.
We invest when the market is low and we can safely buy an ETF and allow it to grow and mature over the next five years to a decade.
When you invest at the beginning of a market cycle, and this is especially true for ETFs, and sell at the end of the market cycle, you will get very good returns on your investment.
So we are assuming the market is now down and it is a good time to buy your exchange traded fund investment. A good one if from Vanguard but there are many types of ETF investments to choose from. Here’s a good list of all the different kinds of ETF investments that are available.
Buy in with the outlook of holding your investment for a long period of time. We are not buying into an ETF in the same way we may do a growth stock. We are also not speculating like those who invest in cryptocurrency generally are.
We are buying stocks for the long term and using a very diversified investment instrument.
And you will see when you invest for the long term in an ETF you will generate very good returns on your invested capital, provided you buy in a time when the stock market is low. Hold your investment for a full market cycle. Selling only when the overall prices of the stocks included in the fund are over valued, realizing a very good profit.