Home » Exchange Traded Funds — How to Maximize Your ETF Success

Exchange Traded Funds — How to Maximize Your ETF Success

by Jeremy Holcombe

Building a portfolio that is strong and diversified takes a lot of work and a lot of patience. Managing a portfolio that is filled with ETFs (Exchange Traded Funds) from around the globe is one of the best ways to do this.

We already know that ETFs offer several benefits over mutual funds, so when you are diving into the world of ETFs make sure you observe some of these basic guidelines.

Rainy Day Funds

We have all heard this term before. A “rainy day” account is basically money you set aside for emergencies or unforeseen things happening. A good rule of thumb is to set aside about 6 months of income if you can. Put this money into a money market account, and have it there in case you miss on an investment.

Keep Portfolios Separate

Portfolios can be separated differently, but most people separate them into core conservative portfolios and growth portfolios. With a core conservative portfolio, your top priority is capital preservation, while growth is a secondary consideration. Your growth portfolios are more speculative, with capital growth as the primary goal. Keep these separate so no lines are blurred.

Diversify Your Portfolios

There are a couple of really good reasons why you need to diversify your portfolios. Unexpected events and market movements could really affect the way your portfolio performs. If you are invested in only one or two things, you can really get slammed. Have investments in ETFs that are on both sides of the risk.

Pick the Best Countries Through Research

Do some research, and do not get carried away by being too concentrated in one country or region. Make sure you take a good long look at the following:

  • The stability and overall political & corporate governance.
  • The legal environment, respect for contracts, low levels of corruption, due process, and rule of law.
  • The macroeconomic environment, including fiscal discipline and currency strength.
  • Political risks that could affect financial markets.

The best time to buy into a country’s stock market is when it is beaten down, but there are also signs that its economic and political problems will improve. If you have a long-term perspective, you might consider annuities specially structured for ETF portfolios.

Cut Your Losses with a Trailing Stop-Loss Policy and ETF Put Options

Sometimes you buy into a stock that appreciates rapidly, and you feel really good about it. However, that same stock then starts to rapidly decline, and you find yourself in a tough position of not knowing what to do. Should you buy more and wait for it to climb again; should you sell off and cut losses; should you let it ride? These are all fair questions . Here is a simple rule to follow that will save you a lot of time and money.

If a position ever falls more than 20% from its high, sell it immediately and reassess the situation. If you invest in an ETF with a sizable downside risk, why not spend a few hundred dollars to purchase a put-option as an insurance policy? That extra few hundred dollars may save you thousands in the long run.

Rebalance Your Portfolio Annually

Keeping your portfolio updated and balanced is crucial. Make sure you look over your portfolio often, and rebalance it at least annually. This will keep your portfolio strong, up-to-date, and positioned properly in the right areas.

Building your portfolios with low-cost, tax-efficient Exchange Traded Funds is great way to build toward retirement, but setting it on autopilot could have some major consequences. Be sure that you are constantly reassessing all of your ETFs and making sure you are invested in what will work best for you.

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