Sunday, August 23, 2009

Of investing in ETFs

Last week, a couple of colleagues of mine was discussing about which stocks are good to buy and one of them was complaining about a stock she got dropping below the price she bought when she went in and pondering whether to sell it or hope for it to increase back up. She said that she regretted the last time the stocks went up to a certain price and she hesitated in selling, hoping it will go up more so that she can earn more. In other words, she was trying to speculate, very much like gambling and I really doubt she made an informed choice in picking that stock as she merely followed her friend as “it’s a good buy”. I was recommending her to look into something like STI ETF as it offers high diversification and generally lower risk with decent returns in the long term. She frowned upon that and the reason was that "it’s so slow…", meaning low rate of returns.

Coincidentally, a friend also supported the idea of index investing over a meal during the weekend. Also, kr commented in line of this topic in my previous post regarding the POSB myhomefund. So what are the advantages of investing into ETFs like STI ETF? For me, it’s really the simplicity. ETFs (Exchange traded funds) are really just funds that track a certain index, say for example the STI, that are traded on the stock exchange just like any other stocks
and it has a generally lower cost as compared to mutual funds as it is passively managed. Furthermore, index like the STI already has a diversified portfolio with a large basket of investment which means the risk is being spread out.

This means you do not need to research very deeply into companies’ financial reports and meticulously pick the correct one. Of course, the trade off is of a lower return. So, whether to go for ETF or the individual stocks, it really depends on a person’s risk appetite, whether he can stomach the ride on the volatility of the stocks market and whether or not he has got the holding power. Having said that however, I do agree that I should take advantage of the fact that time is still with me as I am still young and venture into stocks and not just stay in the comfort zone. After all, I can still afford to lose since I do not have much commitment in my life yet. But I think my point is that it’s good to keep ETFs in my portfolio, just as you should have some bonds and MMFs, etc for sake of diversification.

What you all think?

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