ETFs cannot solve all your problems
Index investing has been touted as the simplest way for anyone to make money from the stock market. The advent of low-cost index hugging ETFs has enabled investors to do index investing easily.
While ETFs are a great invention, it isn't a panacea for all investing problems. Let's understand what ETFs can and cannot do for investors.
If you are clueless about the markets, a broad-based index ETF such as the S&P 500 ETF (SPY)$SPDR S&P 500 ETF Trust(SPY)$or Vanguard Total World ETF (VT) $Vanguard Total World Stock ETF(VT)$can give you exposure to stocks without the headache of picking them.
If you are lazy to analyse companies, ETFs can do the work for you - just buy the entire basket of stocks and you never need to read financial statements or the charts ever again.
If you are not confident of achieving high returns or to do better than index return, ETFs can allow you to get market returns.
The above benefits are obvious and often touted by ETF supporters. But here are what they don't tell you - things that ETFs cannot solve.
ETFs cannot prevent you from panicking during a market crash. Market crashes from time to time without much warning and ETFs are not immune to it. A stock ETF can decline 50% or more in such events and it isn't safer than picking individual stocks. ETFs cannot stop you from selling at the bottom out of panic.
ETFs cannot prevent you from having performance envy. There will be stocks that outperform when the markets are extremely bullish. It cannot stop you from envying your friend who all-in Tesla and made millions out of it. It doesn't stop you from selling your ETFs and hop onto the exciting stocks during such times.
ETFs cannot grant you patience. The benefits of ETF investing only come after several years. You might lose your patience when the returns may seem paltry at the start and it is easy for you to give up. But this is how compounding effect work - slowly and then suddenly - like a small snowball that roll into an avalanche. But it is easy to belittle the snowball while it is small.
Thus, ETFs can solve some of the investing problems but not all of it. If you realised it already, the problems that ETFs can't solve are emotional in nature - panic, envy and impatience. You are your greatest enemy.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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