3 Things ETF’s Won’t Do For You
You see advertisements about “it” at bus stops. “It” is being reported in the business section of newspapers. I’ve also been receiving many questions about “it” from clients. In case you are wondering, “It” is not Star Wars: The Force Awakens. However, quite like the movie, “it” is the new force of investing.
The “it” I am talking about is Exchange Traded Funds or ETFs for short. While there is currently a lot of excitement around this method of investing (much like Star Wars), ETFs is not exactly new (again, much like Star Wars). According to Wikipedia, ETFs were first available in the US in 1993 and if you are wondering, the first installment of Star Wars was in 1977.
Getting back to topic. The basic benefits for investing in ETFs are clear and easily understood. They include a lower cost of investing, the belief that a passive strategy will outperform an active strategy over a long period of time and you can do it yourself. ETFs are used not just by retail investors but also professional fund managers managing hedge funds or fund-of-funds so it is also something professionals invests in.
However, here is the expected financial planner warning, investing in ETFs do not automatically help you to reach or exceed your financial and investment goals. This is because of what ETFs don’t do.
Here are 3 Things that ETFs Don’t Do For You:
1) It will not outperform the index
Unfortunately, the flip side of a passive investment strategy is that the fund has no chance of outperforming the indexes which an actively managed fund aims to do. This is because ETFs are designed to provide returns just like the index, not more or less.
Thus, if your investment goals require a higher than average return, ETFs will not be able to produce the performance or returns that you need.
2) It will not choose the right horse for you
Investing in ETFs is not exactly speculating but you do need to choose the right markets to invest in and hold on to it for a long period of time. Should you choose US or Europe? China or India? Global Developed or Emerging Economies? Perhaps to catch it at a low, Malaysia or Thailand?
Everyone can hold, the key is to buy something worth holding on to.
3) It will not tell you if you are suitable
An important but understated success factor in the passive investment strategy is the need to hold. Not just holding on to the investment when your investment report is full of black ink and the markets are all up but keeping to the plan and holding onto the investments during the periods when the inevitable market corrections occur.
ETFs will not work for you if you don’t allow it the time to work.
Before you make any investments, ETFs or otherwise, risk profile yourself. Probably the only reason you can hold on to your investments over the long term is because you have invested in products suitable to your risk profile. In simple words, you can continue to sleep like a baby when the markets are roller coasting through the nights.
As a practicing financial planner for close to 14 years, I’ve been introduced to many new “forces” of investing yet my personal observation tells me that it is not the type of investment but the character of the investor that really produces results and wealth.
May the force be with you!
Article by Lee Meng, FChFP
(NOTE: Use our free calculator to help you calculate your investment returns, especially if you have invested in Unit Trusts and Investment-linked Insurance Policies. Get yours here)