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Stocks, Mutual Funds or ETF: Which is best for me

Investing in our future is a prudent decision we all must make sometime in our lifelong pursuit of financial security. A prudent first step is establishing a savings regimen that you maintain as priority one. Taking an investment class or Internet tutorial is a good next step, but at some point, you must begin to select the investment vehicles that suit your personal tolerance for risk and fit with your investment goals and objectives. This selection process can be a very daunting task for beginning investors, but ETFs, Exchange Traded Funds, were designed to address this very need in the market.

ETFs are actually a blend of stocks and mutual funds. They exploded onto the scene in 1993, and the latest statistics show that over 1,000 ETFs are listed on exchanges in the United States today. An ETF represents a basket of stocks that attempts to mirror a specific index or sector in the market. The shares trade daily, just as with any other stock, but unlike mutual funds that trade once at end-of-day pricing. Their popularity stems from their tax efficiency, cost structure and flexibility of trading benefits.

ETFs are also not restricted to just stocks. Commodities and currencies have also joined the fray. You will not need a specialized forex broker to dabble in the forex market, but it may help to learn the basics of foreign currencies since many of the best companies are located beyond U.S. borders. Gold, oil and energy issues include many international companies in their mix, and if your preference is the Green Revolution, there are several ETFs established that focus on the renewables space.

The key benefit offered by an exchange traded fund is diversification. You no longer must worry about owning 20 to 30 individual companies, monitoring their performance, and staying current on market trends in their respective sector. You may now pick the sectors that you want, determine the right allocation for your plan, and then implement your strategy based on a mix of pre-selected ETFs.

Determining the right allocation mix for your portfolio depends on a number of factors. Asset allocation is an investment portfolio technique that attempts to balance risk and reward by dividing assets among major categories such as cash, bonds, stocks, real estate and alternative investments. In some cases you may wish to pay a professional to help you with this task. The result will depend on a complete assessment of your financial position, time horizon for retirement, income sources, living expense needs, legal and tax issues, and, lastly, the level of risk that you can tolerate.

The next step is to implement your strategy based on the desired asset allocation formula developed during the previous step. The beauty of ETFs is that you can mix and match them to align with your sector preferences. There are many major ones indexed to the S&P 500 or NASDAQ 100, or any of a number of other segments or combinations. Choose ones that match your allocation requirements and have low management fees. Indexed funds generally have lower fees since the ownership formula is not discretionary as with most mutual funds.

Once you have chosen your target funds, you may want to take a quick tutorial on technical analysis and momentum indicators. Although you are investing for the long-term, wisdom can still yield immediate returns by ensuring that you buy at the right time. Typically, you will want to enter the market when it is in an oversold condition. Chart indicators can help guide you in this respect. Different sectors of the economy cause optimum buying periods to vary, but a guided execution will easily yield material benefits on the front end of your ETF buying strategies.

You are not home free at this point. Monitoring and performance measurement is necessary to keep your investment engine fine tuned for the long-term trip ahead. There will always be losers that must be pruned from your portfolio. If you anticipate inflation on the horizon, then remember that you may want to include a Gold ETF in your portfolio as a hedge against rising costs in the general marketplace. Over time, success in one sector will cause an imbalance to occur in your allocation mix. After a general assessment, make appropriate changes to bring your overall mix back in line with your long-term plan. Reviews on an annual basis, before the end of the year, are prudent. Tax considerations may also impact your decision making process at this time.

ETFs offer many benefits for investors who are looking for a better way to diversify risks and have market liquidity assured. Follow these easy steps, and you, too, may craft a customized ETF portfolio that delivers your desired level of risk and return for years to come.