If you want to diversify your investment portfolio, exchange-traded funds or ETFs are perfect even for newbie investors. They have many perks like a wide array of investment options, low expense ratios, robust liquidity, and so on. Thus, these features make ETFs perfect vehicles to make your money work for you. If you need tips, here are three of the critical ETF trading strategies that every newbie must follow
- Take Advantage of Dollar-Cost Averaging
As a newbie investor, you may have heard of the term dollar-cost averaging. This is a strategic technique that lives up to its name because you buy a fixed-dollar amount of an asset regularly, regardless of the changes in costs. Usually, newbies are young, with fixed incomes and a long investment horizon.
This means you can take a few hundred dollars monthly, and instead of saving it in the bank to be eaten by inflation, you could invest it in an ETF. This periodic investment allows you to pay yourself first, assuring you to accumulate more units when the price is low and lesser units when the price is high, which averages your holding cost. Because you have a lot of time in your hands, this method will pay off well in the long run.
- Benefit From Asset Allocation
As the term suggests, it means allocating a certain portion of your portfolio into different asset classes. For example, you can take advantage of bonds, commodities, stocks, and cash for diversification, an excellent investing tool. Take note, the low investment threshold for most exchange-traded funds makes this choice easy for newbies to implement an asset allocation strategy based on what’s best for your risk appetite and investment horizon.
Risk appetite refers to whether you are an aggressive high-risk taker who will gamble against possible high returns or a moderate one who aspires for less risk but smaller returns. Investment horizon is how much time you will have the money invested before taking it out. For example, placing 100% in equity ETFs is fit for people in their 20s who have more time and higher-risk tolerance, with no kids and big financial obligations. But when life changes, like you, have a family and a mortgage, you can shift this to 40% bond ETFs, which are lower risk and allot 60% in equities ETFs.
- Utilize Swing Trading
This refers to trades that hope to leverage sizable swings in instruments like commodities or currencies, and of course, stocks. Unlike day trades which are rarely left overnight, you can take several days to a few weeks to work details out. The ETF attributes that make them suitable for swing trading are their tight bid or ask spread and diversification.
Since ETFs come in many types of investment classes and a wide array of sectors, a newbie can opt to trade an ETF based on the confidence level. For example, you are well-versed or have knowledge in a specific sector or asset class, then you can do that. After all, you can make better decisions when you are well-informed. To illustrate, someone with an IT background will do well trading a tech-based ETF, while a novice who follows the trends in commodities will fare better in commodity ETFs.
Remember, ETFs are a combination of baskets of stocks and other assets, so they may not show the same upward price trends of a single stock during a good market run. Similarly, the diversification they possess makes them less risky during a big downward trend. Hence, you are protected against possible capital erosion.