So, you use exchange traded funds (ETFs), and you goofed. Don’t cry over spilled milk. Investing pros and newbies alike have all made mistakes. Find out which ones you should be most on the lookout for.
1. Keeping It Complicated. Look, we’ve all got our strategies. That’s great. If you stick to it, even better. But studies have shown that the more complex a trading strategy is, the less likely you are to keep at it or use it. Keep your strategy simple, simple, simple. An easy one we use is trend following, which uses the 200-day moving average to determine buy and sell opportunities. You can read more about it here.
2. Ignoring Costs. Yes, ETFs are on average cheaper than mutual funds. That doesn’t mean all ETFs are cheap and all mutual funds are expensive. Before you buy, do some cost comparing. Also, pay attention to brokerage fees and trading commissions, because these add up. For this reason, it may be better to make your ETF buys in large chunks than incrementally with smaller amounts of money. And lastly, monitor your investments and watch how they perform, but don’t react to every bump and hiccup in the market. [7 Common Mistakes ETF Investors Make.]
3. Not Using Limit Orders. When placing a trade, you can put the trade in at market and execute it at whatever the going rate is at the time you submit the order. This allows you to place a cap on what you are willing to pay and keeps your price within a specific range. [8 Ways Emotions Could Derail You.]
4. Digging Down? Nah. Blindly buying a fund based on name or performance alone might be a fatal mistake. You might be surprised by how some ETFs are weighted or what they contain. For example, “global” infrastructure funds often have their heaviest weightings in the United States; single-country ETFs can be heavily weighted in just one volatile sector or an area to which you already have high exposure in another ETF. [Defining Emerging Markets.]
5. Chasing the Hot New Thing. Leveraged ETFs are incredibly popular, so maybe you snapped up a few. Gold was on a hot streak, so you bought a physically-backed gold ETF. China is scorching, so, hey, why not? But “hot” is not the only consideration when you’re looking for an ETF. Leveraged ETFs aren’t for everyone and require education. Physical gold ETFs have tax implications that might not be ideal for everyone. Not everyone trusts China. By doing a little extra research before you buy, you can save yourself from burns. [What’s the Beef With Leveraged ETFs?]
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.