Kevin O'Leary: 10 Rules of Success to Pick ETFs

Businessman, author and TV personality Kevin O’Leary is no stranger to ETFs with his O’Shares ETF Investments that incorporate his investment philosophies.

In a video with snippets compiled by YouTuber Evan Carmichael, O’Leary outlined 10 rules for success that can be applied to picking ETFs.

1. You Have to Sacrifice A Lot

Though it might be easy to simply follow the advice of a financial advisor or a hot tip from a friend or colleague, the best investments can come from an investor doing his or her own market research.  It’s easy for an investor to get caught up in the ebbs and flows of life, which limits time to do things, such as looking up an ETF’s expense ratio, fund focus, performance, or chart analysis.  However, sacrificing time for other things to do market research can help an investor unearth their own investment ideas and discover trends that market leaders have not been quick to recognize.

2. Trust Your Gut

An investor can look at all the stocks held in an ETF’s basket with all the fundamental and technical analysis showing that it’s a solid investment.  However, there could a be a lingering notion that prevents the investor from actually pulling the trigger–his or her own intuition–it might be the most often overlooked indicator and investors should take their intuition into account even if their analysis tells them otherwise.

3. Have Diversification

ETFs offer the luxury of investing in a basket of stocks rather than shares of one particular stock, but even concentrating on one particular ETF that zeroes in on one specific market sector could open up an investor’s portfolio to unmitigated risk.  Diversifying an ETF portfolio with concentrations from various sectors could help alleviate any unforeseen market disruptions in one particular sector.

Related: Why Investors Should Diversify with a Real Asset ETF

4. Have a Backup Plan

If an investor is looking to own one particular ETF, such as the SPDR 500 ETF (NYSEArca: SPYand the entry price is not to his or her liking, especially during a high volatility market, it’s easy to simply wait, but this could lead to missing out on future profits should prices continue to rise. Even if market prices settle, the entry price might still not be attractive, so it’s best to have a backup plan.  For example, rather than wait for the right entry price of SPY, an investor can also look at another ETF that tracks the S&P 500, such as the Vanguard S&P 500 ETF (VOO) as a backup plan. Other backup options include using an inverse or bear ETF as a hedge to a bullish purchase going in the unintended direction.

5. Be a Leader

The old market adage of the “trend is your friend” is hard to dismiss, particularly when there’s a flock of investors vying for the same hot ETF. This buying frenzy could fuel an inflated price that misaligns with the true market value of a security, which could quickly lead to ETF buyer’s remorse.  Instead, rather than hopping on the bandwagon, an investor could take the lead and explore other uncharted markets that could also derive profitable ETF investments.

6. Admit Your Weakness

Holding on to losing investments can have ramifications to an investor’s pride aside from the balance in his or her portfolio.  If an ETF investment idea goes awry, sometimes it’s better to cut losses short than to continue riding a losing investment into the ground.  As such, investors on the losing end of an investment should know when to swallow their pride and admit their mistakes.

7. Buy Stocks with Dividends

While profitable ETF investments can certainly be had without dividends, it’s difficult to deny the attractiveness of those that promise guaranteed money back on an investment.  As such, an investor can include ETFs that focus on securities that offer dividend payments, such as the Vanguard Total Stock Market ETF (NYSEArca: VTI), Vanguard Dividend Appreciation ETF (NYSEArca; VYG) or Vanguard High Dividend Yield ETF (NYSEArca: VYM).

8. Differentiate Between Family, Friends and Money

Friends and family may offer their investment advice, but it’s best  for an investor to keep his or her ETF investment capital in check and do their own market research before relying on somebody else’s tip.  This way, relationships won’t be sullied due to an investment experiencing a massive downturn.

9. Get Outside of North America

In certain countries outside of North America, emerging markets are outpacing the growth of economic superpowers. As such, an investor should look into ETF investment opportunities that exist in other parts of the world, such as through the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) or the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).

Related: Tilt Toward Trending Emerging Markets Idea

10. Go With Simple Ideas

Legendary value investor Warren Buffett advises investors to “Never invest in a business you cannot understand.” It’s simple advice and a plea to stick to simple ideas based on an individual investor’s own knowledge base.  If an investor is privy to the market fluctuations of real estate, but dismisses homebuilder ETFs in lieu of purchasing cryptocurrency ETFs, but does not understand the business model for cryptocurrencies, he or she may be setting themselves up for failure.  If an investor does not want to take the time to understand the core business of the stocks found in a focused ETF through research, it might be best to invest in industries they already know.

For more ETF investment trends, click here.