If you crawl the internet, as I often do, looking for ways
to accelerate your wealth, you will see gobs of articles
written about ETFs vs. mutual funds. This article intends
to inform you about an often overlooked difference between
the two classes of investments.
It is a difference that could cost you thousands in your
investment or retirement portfolio.
Okay, maybe you do not HAVE thousands in your investment
accounts. If you are just starting to invest your money,
pay particular attention my friend. The following page
should make your decision between an ETF (exchange traded
fund) and a mutual fund clear enough to make an investment
decision or take corrective action if necessary.
More seasoned investors will already know the basics that
follow but saying them again can not hurt.
ETFs and mutual funds are similar in that they both hold
baskets of securities. A balanced mutual fund can hold
bonds, stocks, T-bills and some cash. An ETF is essentially
derived from stocks but takes on many forms.
Before I tell you about the potential mistake that could
cost you thousands, here are the important differences
between ETFs and mutual funds:
* Mutual funds are actively managed by a person who gets
paid by people like us usually from the money that WE give
him to manage. ETFs are purchased by us and can be bought
and sold all day long with few restrictions and almost no
minimums.
* Mutual funds charge 2% or more between loading and
maintenance, whereas ETFs typically charge between .5 and
1%. Mutual funds usually have no transaction fee. Brokerage
commissions must be paid when purchasing an ETF.
* Mutual funds incur capital gains even though no
distribution activity (money back to you) takes place. ETFs
usually find a way to avoid these taxable events. This is a
significant advantage for an ETF and worse, it is not
always clear to the investor how and when it happens.
* Mutual funds mitigate risk by sometimes holding cash in
anticipation of a down stock market. ETFs are not actively
managed, therefore, YOU the investor and purchaser of the
ETF must account for this risk when you decide to buy them.
Position sizing is one important consideration with an ETF
purchase to manage this particular risk.
Here we go now. The biggest mistake you can make in your
decision to allocate to mutual funds or ETFs is to overlook
one HUGE advantage an ETF holds over the mutual fund:
* STOP-LOSS order: This is a tool you can employ to
nail-down a floor beneath which the price of your ETF
cannot fall. You arrange this with your broker or click a
button if you are investing with an online brokerage. NO
SUCH PROTECTION IS AVAILABLE with a mutual fund. And do not
expect your fund manager to point this out.
This tactic can stop the bleeding if things really go wrong
with the stock market. Better yet, you can set the stop
loss and put it on automatic.
This is proactive management of your money, not merely
active.
Whether you are just starting your investment portfolio or
are a qualified investor you will want to keep yourself
informed about the risks and strategies inherent with each
class of personal financial investments. Certainly part of
this is deciding the credibility and point of view of the
people providing the information you are seeking.
When seeking information or advice on how to accumulate and
protect personal wealth it is always useful to keep in mind
one question: has the person from whom you are seeking
advice actually done what you want to do?
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Randall and Nancy Berry help serious entrepreneurs
accumulate, accelerate and protect their wealth with a
home-based business. An income of $250K during the first
year is realistic and attainable IF you believe and let us
guide you. No selling or telling. About $3000 to start.
Please visit us at http://www.YourLastBusinessEver.com
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