When managing your own portfolios, an exchange traded fund investor should have a plan in place to act as a guiding North Star in navigating the changing markets.
Investors who plan on managing their own investment portfolios should stick to a plan that would help them stay the course as a way to limit trades based off capricious, emotional responses.
Gary M. Stern for Bankrate outlines five simple tips self-directed investors can use as a guide.
Have a plan. Many do-it-yourself investors hop from one investment to another, often buying high and selling low, as they chase hot money.
“Successful investing begins with a time-tested and well-researched investment process that must be followed religiously,” Paul Schatz, president of Heritage Capital, said in the article. “Investing can’t be done by the seat of your pants.”
Schatz argues that consistently investing a regular amount in both good or bad times can result in better savings over time due to the effects of compounding.
For instance, at ETF Trends, we utilize the 200-day exponential moving average to provide us with a guide. If an ETF dips below the trendline, it is time to reconsider the investment, and if a fund crosses the trendline, it could be a buy signal. [An ETF Trend-Following Plan for All Seasons]
Check your emotions. When an asset or sector does well, many investors may get caught up in the hype and chase hot money, potentially entering an overbought market. The opposite is also true. When fear crippled investor confidence at the height of the financial crisis, many missed out on the opportunity to buy at the bottom. [Think About Using Commodity ETFs as a Portfolio Diversifier]
“Investing on emotion destroys returns,” Schatz warned. “People buy high and sell low.”
Along with having a plan, investors will have to maintain the discipline to stick to it.
Due diligence. Researching an investment involves more than just looking at how a security is performing or pinpointing the top and bottom. Investors should consider a fund’s holdings, investment strategy, fees and fundamental market conditions. [High Active Fund Fees Make Passive ETFs Look Attractive]
“As the saying goes, past performance offers no guarantees of future performance,” Allan Katz, president of Comprehensive Wealth Management Group, said in the article.
Stick to the plan. Investors should plan their portfolios with their own time-horizon and risk exposure in mind. The investment portfolio strategy should include an outline of how investments will be diversified and the percentage of portfolio exposure to each asset class. Additionally, an investor should think about rebalancing his or her portfolio at least annually to keep portfolio allocations in check.
Need help? Sometimes asking for help from financial advisors can focus an investor’s expectations. Schatz points out that most advisors have crafted their own strategies and know how to establish a thought out portfolio. While investors can opt to go the full advisory asset manage route, you can also pay a professional by the hour or contract an advisor for a project.
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.