ETF Investment Risk 1: Being Too Conservative
Nobody sets out to lose money investing. But if you aren’t taking any risks with your ETF Investments you can’t expect to make any money either!
Risk and reward are very related when it comes to investing in the market – whether you like it or not!
A portfolio that is too heavily invested in cash or bonds simply isn’t going to bring you significant investment returns. You must take on some investment risk and include growth ETF’s in your portfolio such as:
- VGS – International Shares
- VGE – Developing Market Shares
- IJR – Small Cap Shares
I suggest using an asset allocation of 70% growth, 30% income.
ETF Investment Risk 2: Being Too Aggressive
After almost a decade in a bull market everyone starts to get cocky. Margin loans start being used to buy shares. Credit cards start being used to buy bitcoin. And passive investors start to allocate more of their portfolio to “growth”.
It seems like the good times are never going to end.
But the good times always end.
The next stock market crash is always just around the corner.
And stock market crashes always happen when it causes everyone the most pain. Like the month after you decide to increase your asset allocation to 90% growth.
Be smart. Stay the course.
Keep it at 70% growth, 30% income.
ETF Investment Risk 3: Trying to ‘Time the Market’
At some point in everyone’s investment life they look at a chart of the market and think:
“I would have made so much more money if I had just bought the lows and sold the highs”
In their head they are visualizing how easy it is to know when the market has topped or bottomed.
Stop that right now.
I am serious.
If you are good enough to be able to buy the lows and sell the highs, why are you even working? Or reading about ETF Investing Risks?
If you are that good then:
- Quit your job
- Head on down to Cost Converters and take out a personal loan
- Start playing Gordon Gecko for yourself on your CFD account
You should be retired in no time! If you are good that is..
But you aren’t that good. So forget about timing the market
Regular contributions to your investment accounts will pay off over time.
Be the tortoise, not the hare. And leave the market timing to the wannabes.
ETF Investment Risk 4: Paying active fund managers who can’t outperform the index
Speaking of wannabes, let’s talk about Active Fund Managers.
If Active Fund Managers could truly do as they advertise and beat the market. Then it logically follows that they would use this skill for self enrichment.
But rather than actively trading stocks and printing money, Active Fund Managers choose to use other people’s money to invest in the sharemarket.
And they charge them between 1% and 2% for the pleasure.
Why do you think this is?
Well the following report from Standard and Poors analyzed Active Fund Manager’s performance over 15 years and sheds some light on the situation.
Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.
Shocking isn’t it?
The vast majority of Active Fund Manager’s simply cannot beat the market.
Don’t get caught out by these con artists.
Stick with a passively invested ETF Portfolio.
The fees are cheaper and you will earn better returns than with an Active Manager
ETF Investment Risk 5: Counter-party Investment Risk
Counterparty risk is the risk that someone you are doing business with is unable to meet their obligations to you.
An example of counterparty risk is: if a bank was unable to give you cash when you made a withdrawal from an ATM.
Counterparty risk is often viewed as something beyond your control. But there is one step you can take to minimize the ETF investment risk from counterparties.
If the Global Financial Crisis taught us anything it is that not all banks are safe.
It also taught us a new term: Too Big To Fail.
We learned that some financial institutions would simply impact the market too much if they were allowed to go bust. Lehman Brothers was not Too Big To Fail, Bank of America was.
You want to be invested with the Bank of America equivalent in Australia.
And which bank is Too Big To Fail in Australia?
Well the SMH reports the Australian Online Broker Market Share as follows:
- 50% Commsec
- 18% E*Trade
- 8% Westpac
- 7% ANZ
- 5% BellDirect
If anything went wrong, I predict that the government would only step in and save one of these companies.
Just another reason to invest with Commsec.
Sorry to those of you who use offshore operators like SaxoBank and IG Markets. You don’t stand a chance in the event of a crisis.