At the dinner table, my family and I were sharing things that happened that day when my daughter said something that took me by surprise.
“It was a pretty good day, I bought 10 shares of Apple.”
Clearly, my face showed how confused I was.
She went on to explain how her class was participating in an investment challenge. A computer program gave them a certain amount of spending money to start out with and students were able to invest in their favourite companies.
Pretend or not, it was pretty cool. My daughter had just bought her first stock!
We went over her “portfolio” together and it was mostly as I expected — Apple, Fitbit, Snap and Netflix.
Not the kind of spread that I would ever recommend. But she was in luck, because I know a thing or two about diversification.
However, my daughter wasn’t up for Dad to start messing with her stocks — these were the names she knew and she was sticking by them.
Besides, all of the companies she chose were completely different… wasn’t that enough?
Now, I’ll give my daughter a break. She’s only 10.
But I’m willing to bet that when you first started investing — most likely when you had already graduated grade school — you made a similar diversification mistake with your portfolio.
In fact, you could still be making this mistake without even knowing it!
You might think your investments are diverse enough because they are in vastly different industries… but you’re wrong.
Individual stocks — even of the strongest companies — aren’t immune to the market swings that we’ve seen recently. We’ve seen that first hand as some of our favorite stocks are up big one day and down big the next.
But there’s a better option than relying on these individual stocks to protect and grow your wealth…
Instead, you can ride the gains of entire industries without stressing about the day-to-day action.
Actually, you’ve probably heard of this hands-off way to supplement your retirement income… but here’s how you can begin today.
If Only My Daughter Knew About ETFs…
What I’m talking about are ETFs or “exchange-traded funds.”
To give you a quick refresher — an ETF trades just like a stock, but instead of covering a specific company, it covers an entire market or industry.
You can spend hours thumbing through research, financial statements and chart patterns to decide whether or not to invest in a company… but you could still be wrong.
ETFs help alleviate some of that risk.
Take one of my daughter’s favorites — Netflix Inc. To buy even 10 shares of this company, she had to shell out $2,980 of the $10,000 she had to spend.
Since then, her position has been bleeding cash (I don’t want to say I told her so, but…).
Not to mention, she spent even more to get in on Apple stock.
Instead of tying up all of her capital in just a handful of expensive tech stocks, it would have been a better choice to go with an ETF like Invesco QQQ Trust (QQQ), which has exposure to some of the biggest tech names like Apple, Netflix, Amazon, Google and more.
To invest in 10 shares of this ETF would have cost around $1,870… a significant discount to investing in any one of its major holdings.
And its performance isn’t as volatile! Just check out this comparison between the QQQ and NFLX over the past few months:
Because shares of QQQ are comprised of so many different companies, its price doesn’t suffer as much from an earnings miss or news headlines that might depress one individual stock.
But it still follows the overall trend of the stocks it tracks. So it’s a great way to get into these popular tech stocks at a cheaper price and without taking on as much risk.
And tech isn’t the only sector with an investable ETF! There are plenty of ETFs from every corner of the market that will boost your portfolio.
Putting Your Eggs in Different Baskets
One of the investment rules I’m sure you’ve heard time and time again is “Don’t put all your eggs in one basket.” It’s a popular saying that simply means… diversify, diversify, diversify.
But like I said, individual stocks are susceptible to market volatility which can cause them to quickly lose value without any real reason. So buying shares of one company could actually be putting your eggs in one basket… leaving you open to significant risk.
On the other hand, filling your portfolio with ETFs is your ticket to true diversification, while still allowing you to capitalise off of trends.
Tech is a popular go-to, but there’s no shortage of industries and parts of the market that are gearing up for significant gains without taking on the same risk as buying stock outright.
So if you don’t want to lose your shirt in a sudden selloff, you could consider ETF’s like Vanguard Real Estate Index Fund ETF Shares (VNQ), Utilities Select Sector SPDR Fund (XLU) or Invesco S&P 500 Low Volatility ETF (SPLV).
That way you can make sure your portfolio is properly diversified!
Here’s to growing and protecting your wealth!