Maxing Out Your 401(k) in 2022: Should You Do It?

An ETF (exchange traded fund) is an investment asset, consisting of a pool of investments, usually with shares from different companies. Like mutual funds, ETFs usually “track” a particular market index (like the S&P 500), but unlike them, they are easy to buy, sell, and exchange at a brokerage just like a stock from a regular company.

Thanks to the diversification they offer, ETFs are widely considered the ideal option for a beginner investor. They have many benefits over traditional stocks (i.e. company shares), including:

  • Massive diversification
  • A low minimum investment
  • Small expense ratios
  • Historically stable returns
  • Unlike traditional company shares, they don’t require too much stock market analysis

Are ETFs a Good Investment Strategy?

We’ve already explained why ETFs are a stable investment—they have in-built diversification and are relatively cheap to buy. In simple terms, this means that you don’t need too much capital to get started, yet you get to enjoy the benefit of trading them like stocks. These are the primary reasons why ETFs are a great investment strategy—especially for beginners or those looking to establish a good pension fund investment strategy.

In addition to ETFs, regular stocks are also a good investment strategy, but for most people, ETFs will be a better starting point. For starters, ETFs offer broad access to multiple assets and markets, different industry sectors, and economies in different countries—all under one share. However, to invest in ETFs, you’ll need an investment strategy to go by, as it would be much better to have a guideline rather than to navigate the market yourself. Continue reading to learn more about the best ETF investment strategies.

1. Dollar-Cost Averaging

DCA, or dollar-cost averaging, is the simplest and most foolproof strategy to go for as a beginner or intermediate investor. The DCA strategy states the following:

An investor should buy a fixed dollar amount on a regular schedule (such as every 1, 3, or 6 months) on the same asset, regardless of the asset’s changing costs.

The benefits of using the DCA strategy are the following:

  • It teaches investing discipline
  • It minimizes risk despite price fluctuations
  • It’s almost always profitable if one sticks to it long enough

Who should use dollar-cost averaging? Dollar-cost averaging is a great strategy to go for regardless of your experience level, as both completely new and knowledgeable investors alike can go for it without having to learn anything special about the market. Most investors utilizing the DCA strategy are beginners who have just joined the workforce (i.e. people in their early 20s and 30s), meaning that it’s best recommended for those who have a stable income.

2. Swing Trades

Unlike DCA, swing trading is a slightly riskier approach to investing, which is a strategy based on finding larger “swings” in assets—be it stocks, indices, or cryptos. With this strategy, many get fooled by the keyword: trading. Keep in mind that, unlike classic day-to-day trading, swing trades are positions that are held for a long time. They often require weeks—or even months—on end to work out and be profitable, and they’re usually placed on a specific asset or asset class.

 

The benefits of swing trading are the following:

  • It doesn’t require too much market analysis or knowledge about the current economic climate
  • It doesn’t take an overly active approach to trading and investing, requiring no more than a couple of hours per month
  • It provides a small to medium profit level, as it’s based on utilizing the biggest market swings possible

Who should use swing trades? Our previous strategy (DCA) is probably one of the safest approaches one can take to investing, which is not the case for swing trades. This is an investing style that has bigger risks, meaning that beginners should stay away from it, as it’s primarily suitable for intermediate and experienced investors.

3. Hedging

Hedging is an investing style made with the intention of reducing risk when an asset loses value. Namely, a hedge is an offsetting (i.e. opposite) position of the one you intend to take, primarily done with the goal of reducing risk and minimizing losses in case your initial position goes south. Most experts refer to hedging as an “insurance policy”. However, as is the case with most insurances in real life, you have to pay for it.

The benefits of hedging are the following:

  • It drastically reduces losses
  • It allows traders to survive big market swings
  • It helps increase overall liquidity

Who should use hedging? Hedging is a strategy best suited for investors who want to minimize their risk, but won’t mind having smaller profits for it. Of course, hedging carries its own risks, as it isn’t a foolproof strategy, which is why it’s best suited for investors who have passed the beginner stage of investing.

Should You Invest in ETFs Over Other Strategies?

Long story short, ETFs are a great asset class to invest in, especially as a beginner or intermediate trader. They offer the smallest risk possible while giving you incredibly broad market access, which in turn leads to minimal volatility. Many also like to discuss the concept of CFD vs ETF for investing, though we would recommend sticking to ETFs if you are a beginner or intermediate trader. In fact, ETFs are even a suitable investment strategy for senior citizens without investment experience.

Before taking the final step and diving in the world of ETF investing, it’s necessary to register at a good and reliable broker where you won’t have to be concerned about your money. Consider checking out our list of the best ETF brokers and going for the one that suits you best.

Want to know how to retire comfortably in the US? Read How Americans Can Retire Comfortably.

Related Posts