Investing made simple the Warren Buffet way - how to put it on autopilot with Exchange Traded Funds (ETF's)
Categories: HOWTO, Finance, Money, Success, Business, Interesting, Investing, Wealth
Day trading, precious metals, real estate investment schemes, annuities, whole life, etc... are all terrible investment and very risky ideas and should be avoided (you would be far better off playing the lottery as your odds are better there). These items are solely being pushed for the sellers benefit, not yours. Many of these people literally make millions off of unsuspecting buyers and quite a few have come under legal scrutiny (just look up their company with the FTC and search under investment schemes). The buyers rarely even make back their initial investment.
Yes, there is a very, very slight chance that you might get one great return. But when you trade all the time or your insurance agent/financial consultant does it you will also experience losses. And over the last 100 years more people have lost money in all of these schemes than won. Just use your head and think, if these day trading, real estate speculation, market timing, etc... schemes all worked, then why aren't they used by the experts on wall street like Jim Cramer of Mad Money and others with literally billions that they are responsible for in their funds? They don't use them because its probably better odds to play the lottery as you are just throwing your hard earned money away. You work far too hard for your money, you need to hold on to it, care for it and let it grow. Proper investing in stocks, real estate, precious metals, etc... takes proper research and your, what we call, due diligence.
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Due diligence is researching and finding out not only about the company, but its industry, suppliers, the economy, global economics and their potential impact and influences. Sometimes even with proper research the executives lie and cheat like in Enron and Worldcomm and inflate numbers and improperly report returns and profits. There are thousands that lost a huge portion of their life savings and net worth when companies like Enron and Worldcomm went under. In cases like this there may be lawsuits afterwords and you may get a little bit of your money back, but for the most part its gone. Look at AHM (American Home Mortgage), a well regarded Alt-A or no Doc and stated income mortgage provider. They were trading at 30+ per share and providing a nice 12% or so dividend and then dropped to $0.29 fast upon announcing they were going to default on their latest dividend and then subsequently file bankruptcy. They did most of this after hours so share holders were stuck and could not sell off in time. The reason I am telling you this is that with a good ear to the floor and a lot of research like the best professionals you might have been able to get out of AHM at $14 to $20 and suffered only a 30 to 50% loss, but you would still have lost and therefore you need to diversify in different stocks, different industries, even different countries and economies.
If some of the Enron shareholders and employees had been more diversified (many employees were not unfortunately) they could have at least minimized their losses or even had a gain in some other stocks instead. Now, this is where the problem lies. The more stocks and funds you are invested in, the more research that is needed and as you get to 5 or 10 stocks it can easily become a full time business to just do your due diligence and properly research everything. Most people do not have this kind of time as they have to work also. This is where the Exchange traded fund or ETF comes in. It does all the work for you by following the entire weighted investment of the exchange it targets. An exchange traded fund is exactly what it says a fund compromising all the items of the exact exchange in question. And unlike many mutual funds, ETF's usually have a very low management cost so they save you more in the long run also (always be sure to look at and know what your true operating costs or management fees are as they can take a good portion of your earnings, especially in high fee funds - you can easily look up a fund, ETF, or any stock for free on cnnmoney.com, morningstar.com or msn.com and get very detailed info on true costs, portfolio (how diversified is it really?), and returns, estimates and past performance).
The ETF was designed as an open ended fund that just like a stock can be traded throughout the day and replicates a stock market index like the Dow Jones or S&P 500. There are many ETF's outthere and some do specialize more than others like the energy sector ETF's and others. For best protection and safety it is wisest to pick a ETF that is well or better diversified as certain sectors can and will at times have off periods. There are ETF's for the larger industries like the S&P 500 and there are others which cater towards smaller startups or emergent technologies and markets like China, India and others.
What's really important here is that with ETF's and the stock market is that over the last 20 years the exchanges like the S&P 500 have produced a nice average return of around 10.25% per year (and 10.20% since 1925). This is far better than the averages for money markets, CD's, bonds and of course savings accounts. Yes some stocks have beat these returns like Microsoft, Apple and Exxon Mobil (XOM) have easily beaten this, but some top ranked stocks have also tanked and lost money. Who wouldn't want a fairly sure thing like 10.25% over the past 20 years or even 60 years? Now that's stability! Over time a well diversified portfolio in ETF's that replicate a strong or cornerstone exchange like the S&P will do very well and minimize the stresses of localized or non diversified stock investments. According to Warren Buffet, ETF's are the single most important investing weapon for long term wealth building (per Newsweek). I am not an expert on this, but Warren Buffet is and just about everyone says he is the greatest investor of all time so that's good enough for me.
Another great tip here is to use Zecco.com which provides free trading with no trade minimums. A definite plus for anyone and everyone - otherwise trading fees will always snag a percentage of your profits (obviously a bigger percentage and larger factor for smaller investors). If you like this article and our blog and you found it beneficial please link back to us so that we may continue to provide great helpful posts packed full of information, tips and more that you will find no where else.
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I wholy agree that ETF's are a much more stable investment. I particularly like Vanguard Materials ETF (VAW) which has gone up 40% in the past year and is up over 10% in the past month alone. I like the midcap and smallcap ETF's best.
Walter R.
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An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
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Good editorial.
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