When it comes to investing, there are more options than episodes of Neighbours. So which is right for you?
When it comes to investing, there are tonnes of different options out there. We’ve got exchange-traded funds (ETFs)...micro-investing…active investing…day trading… Honestly, there are more options than episodes of Neighbours.
If you’re just starting out, it can be hard to know what to invest in. So most beginners will look at investing in ETFs. Others may choose to invest a small amount into a specific stock that they are interested in.
Let’s break it down.
So, an ETF is a type of fund that invests in multiple companies. That means when you invest in an ETF, it will track a group of shares, like the ASX200 or the NASDAQ. But ETF’s can also be focused on a particular theme (i.e. e-commerce, data, tech, mining).
The beauty of an ETF is that it can be bought or sold just like any other stock on a stock exchange.
Think of an ETF like a smoothie. Rather than having a banana smoothie by itself (i.e. investing in a single stock), an ETF gives you a mix of flavours. You may choose to add blueberries, strawberries, apple and some chia seeds to your smoothie. This enhances the flavour, but also gives you additional nutrients.
ETFs give you exposure to a range of different stocks and therefore provide you with diversification. So rather than investing in Adore Beauty directly, you may choose to invest in an E-commerce ETF and get exposure to a range of companies.
That means if Adore Beauty was to perform poorly this year, but its competitors performed well, it wouldn’t affect your investment portfolio to the same degree as if you had invested directly in Adore Beauty. That’s why ETFs can often be less risky than just investing in singular stocks.
ETFs are generally cheaper, too. This is because they’re passively managed (aka, a fund manager ain’t sitting there calling many shots…they’re generally just letting it track an index).
You’re not generally going to ‘outperform’ the market because your ETF is likely a reflection of market performance (remember, it can have 100’s of stocks in it). But here’s the hot tip: active investing (like picking individual stocks) can lead to ‘worse-than-average results’. That’s according to Warren Buffett.
As ETFs are designed to track an index, it doesn’t mean your returns will always match the returns of the index. This is because of things like tracking error (aka an ETF strays from its intended index) and management fees.
Investing in individual stocks means heading to brokerage platforms like Superhero or CommSec, picking the stocks you like and making the required minimum investment to secure your choice.
It could be Westpac…CBA…Telstra…Rio Tinto…whatever the stock, you are investing in it on its own.
Picking your own stocks means your share portfolio is completely personalised. You know exactly what you’re invested in - because you chose it. And (hopefully) you’re confident that each individual stock is a strong investment.
If you like to be in control of things, this is a great option.
Research, research, research. It ain’t fun…but if you’re choosing to invest in individual stocks, you’ll need to do some recon on them. How have they performed in the last financial year? What are the company’s fundamentals? Who’s in charge? What’s the strategic plan?
These are all things that (should) influence your buying decision, but it can often be a lot to wrap your head around.
There ain’t no right or wrong answer. Both investment strategies suit different investors. So, ask yourself whether you’re a hands-on…or hands-off investor. Whether you want your portfolio to be truly personalised…or you’re alright with whatever the fund manager chooses.
Good luck!
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