November 29, 2024 • 18 mins
Ever feel like the market’s just out to get you? One day, your portfolio’s coasting, and the next, a single newsflash sends it spiraling. It’s unnerving—stressful, even. But here’s the thing: Exchange-Traded Funds (ETFs) might just be the unsung hero of your investment strategy, especially when it comes to managing risk. They’re like a safety net—except one you can actually tweak and customize to suit your exact needs.
Unlike individual stocks that make you put all your hopes (and fears) into one place, ETFs spread the risk across multiple assets. Imagine having a basket—not just one egg—to protect against the inevitable cracks. And we’re not just talking generic diversification here; we’re talking options that suit nearly every kind of market chaos. Ever heard of inverse ETFs? They’re designed to hedge against downturns, moving in the opposite direction of the market. It almost feels counterintuitive, right? Yet when markets nosedive, they can be a lifeline. And then there are bond ETFs—calm, steady, like the friend who never panics, even in the worst storms.
What’s wild is how flexible ETFs are. Inflation spikes? Energy prices suddenly skyrocket? There’s an ETF that probably thrives on that exact chaos. It’s like they’re always one step ahead of whatever curveball the economy throws our way. Just think back to earlier this year—when inflation jitters were everywhere. Gold ETFs? They were like the “it” asset. And when energy costs hit record highs, sector-specific ETFs became the darlings of savvy investors. Real-world solutions, real-time adaptability.
The best part? They’re shockingly simple to use. Low fees, minimal barriers—it’s like they were made for the average investor who doesn’t have hours to pour over complicated strategies. And let’s not forget the power of accessibility. ETFs don’t just make risk management possible—they make it practical.
So, here’s the deal: you don’t have to let market volatility dictate your moves. Take control. Learn how to use ETFs to not just survive but thrive. Ready to take that step? Subscribe now, share this episode with someone who's tired of riding the market rollercoaster, and let’s build portfolios that don’t just weather the storm—they stand strong through it.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Okay, you know that feeling, right?
(00:01):
When the market takes a quick dip
and suddenly your stomach just drops with it.
Yeah, we all love a good bull market, of course,
but those inevitable downturns,
well, they can be pretty stressful, right?
Definitely.
So how do we make those drops a little less, well, scary?
Today, we're diving into ETFs, Exchange Traded Funds,
and how they can be a really powerful tool
(00:22):
for managing risk in a portfolio.
Absolutely.
Think of ETFs like the seatbelts,
you know, on this crazy investment roller coaster
we're all on.
Have you ever felt that, that stomach dropping feeling?
I think ETFs can really help to smooth out that ride.
They're basically a basket of different assets
like stocks or bonds bundled together,
and this built-in diversification, that's key.
(00:44):
You know the old saying,
don't put all your eggs in one basket.
Right.
But with ETFs, the basket itself,
well, it's already designed to spread out that risk.
So instead of worrying about one single stock,
you know, taking a nosedive,
I've got this built-in safety net, right?
But why is having all these different asset classes
within a single ETF so important?
Imagine you have an ETF and it holds stocks
(01:05):
from different sectors, right?
Like tech and energy, healthcare, let's say.
When tech stumbles, you know, like it did in 2022,
energy, well, that might be surging
because of global events.
Makes sense.
So holding both in your ETF,
well, it means you're not completely exposed
to just one sector.
Ah, so it's like having a diversified portfolio,
(01:27):
but on autopilot, I kind of like the sound of that,
but hold on, I've also heard that you can trade ETFs,
just like individual stocks, like in real time.
Is that true?
Absolutely.
That's actually one of the biggest advantages of ETFs.
Let's say you see tech starting to weaken a little bit,
but then energy is gaining some momentum.
You can actually sell some of that tech sector ETF
and buy more of that energy ETF.
(01:48):
And you can do it all in the same trading day.
Wow.
So it's like you can actively manage your own risk,
but you don't have to juggle all those individual stocks
and sign me up.
And this is where things get really fascinating for you.
The whole idea of advanced hedging.
Like ETFs, they offer some really cool tools here,
don't they?
They do.
Let's start with a type of ETF called an inverse ETF.
(02:09):
These are ETFs designed to move in the opposite direction
of the market.
So if the market goes down,
well, an inverse ETF could potentially go up.
Wait, so I could actually make money during a downturn?
That sounds almost too good to be true.
There's a reason I emphasize potential there.
Inverse ETFs, they use derivatives to achieve
that inverse correlation.
They require some very careful timing to get right.
(02:31):
They're not a magic bullet for sure
and definitely not a long-term strategy by any means.
Think of them more as a tactical tool
for an experienced investor.
You have to be really precise with how and when you use them.
Got it.
Precision is key.
So what about those more stable options?
Where do bond ETFs fit into all of this?
Bond ETFs, especially those holding high grade
(02:52):
or government backed bonds,
they kind of act like an anchor for your portfolio.
When stock prices are going up and down like crazy,
bonds tend to be more stable,
so they can help smooth out those bumps
for your whole portfolio.
So it's all about balancing that risk.
Having some assets move one way
and others move the other way.
OK, now I'm a little curious about these volatility ETFs.
(03:14):
They're connected to market fear, right?
But what does that actually mean?
Good question.
Volatility ETFs are actually linked to something called
the VIX, sometimes called the fear index.
It basically measures how anxious the market is
at any given time,
essentially how much prices are expected to swing.
OK.
Think of it as a barometer for how much fear is out there.
(03:35):
So when volatility is high, meaning the market's super jittery,
these ETFs tend to go up.
So it's like you're betting on fear itself.
That sounds kind of intense,
even for someone who doesn't mind a little bit of a thrill
when it comes to investing.
Who would actually use something like that?
They're definitely not for everyone,
and they can be pretty complex to actually understand.
Volatility ETFs are generally more suitable
for experienced investors
(03:57):
who really understand the risks involved.
Think of it like having a financial umbrella.
When you know there's a storm coming, not foolproof,
but potentially helpful in the right hands.
Speaking of real-world scenarios,
wasn't there a surge in those gold-backed ETFs recently?
I think I read something about inflation concerns.
Absolutely.
When inflation worries started making headlines,
(04:19):
a lot of investors turned to gold-backed ETFs,
sort of as a safe haven.
It's a classic example of how ETFs can really reflect
what's happening out in the world almost in real time.
And didn't we see something similar happen
with energy ETFs during those crazy oil price spikes?
It seemed like everyone wanted to get in on that action.
Exactly, sector-specific ETFs,
(04:40):
like those focused on energy, yeah.
They saw huge spikes in popularity
during those periods of high oil prices.
It highlights how adaptable ETFs can be, you know,
allowing investors to quickly adjust their portfolios
based on what's happening.
It's like having this super flexible toolkit
for managing your investments.
Honestly, a lot of people get intimidated
by other hedging tools, you know,
(05:01):
like options or futures contracts.
But ETFs, they seem much more approachable.
Why is that?
You're right, they are generally more accessible.
ETFs typically have lower expense ratios
compared to some other hedging tools.
And there aren't as many barriers to entry
for everyday investors.
It's like the difference between, say,
a sleek hybrid car and then a clunky gas guzzler, right?
(05:23):
Both can get you where you need to go,
but one is definitely more efficient.
Yeah, okay.
And probably more cost-effective.
So if we were to zoom out a bit,
what's the key takeaway here when it comes to ETFs?
I'd say the key is that ETFs give you options.
They empower you to navigate
the ups and downs of the market, you know,
with more control and potentially a lot less stress.
But, and this is important.
(05:44):
Hold on, I sense a butt coming.
There's always a butt when it comes to investing, right?
You got it.
And that's where we'll pick things up in part two.
We've covered a lot of ground,
but there's much more to explore.
You're right, there's always a butt, right?
And ETFs can be really powerful tools,
but they don't eliminate risk entirely, not at all.
It's about managing that risk, you know, effectively.
And that starts with understanding,
(06:06):
I guess, your own comfort level,
how much fluctuation can you actually handle
in your portfolio without losing sleep at night?
Right, because everyone's roller coaster tolerance
is different.
Some people, they love the adrenaline rush,
and then others just want that smooth scenic ride.
So how do you figure out where you fall on that spectrum?
That's where this whole idea of risk tolerance comes in.
(06:27):
It's just a fancy way of saying,
how much are you willing to lose, you know?
Once you kind of know that comfort level,
you can start building an ETF strategy
that aligns with your own goals.
Are you in it for the long-term,
that slow and steady growth?
Or are you more interested in like,
shorter-term, potentially higher risk opportunities?
That makes sense.
But I gotta admit, the sheer number of ETFs out there,
(06:48):
it can be kind of overwhelming, you know?
Where do you even begin to choose?
It definitely can be, it's like, information overload.
That's where good research comes in.
A great starting point is just looking
at the ETF's underlying holdings.
What assets is it actually tracking?
Does it align with your investment philosophy?
And that risk tolerance that we talked about.
(07:09):
Okay, so it's like peeking under the hood of the car,
making sure you understand what's actually in the ETF
before you buy it.
What else should I be looking for?
Fees are important too.
Pay close attention to something called the expense ratio.
This is the annual fee that you pay to the ETF provider,
and obviously the lower the expense ratio.
The more of your money stays invested and working for you.
(07:30):
Those sneaky fees.
Yeah.
It's like the fine print you always have to check.
But at least with ETFs,
those costs are usually pretty transparent, right?
Much more so than with some other investment vehicles out there.
You can usually find the details you need
in the ETF's prospectus.
Okay, prospectus checked.
Fees understood.
Anything else that should be keeping an eye on.
Trading volume can make a difference.
(07:51):
ETFs with higher trading volume,
they tend to be more liquid,
meaning it's easier to buy and sell them,
without those big price swings.
So it's like checking how busy the highway is
before you merge, right?
You don't wanna get stuck in a traffic jam.
Yeah.
When you're trying to make a move.
Exactly.
And finally, don't forget to consider the ETF's track record.
How's it performed in different market conditions?
(08:13):
Has it consistently met its stated objectives?
So it's like checking those online reviews
before you book a hotel.
Or try a new restaurant.
You wanna see what other people's experiences
have been like.
Exactly.
Past performance doesn't guarantee future results,
of course, but it can offer some valuable insights.
Okay, let's say I've done my research,
picked out my ETFs,
and I'm ready to ride this volatility wave.
(08:34):
How do I actually use these things to my advantage?
Now the fun begins.
Let's talk about some practical strategies.
For using ETFs to manage risk
and hopefully boost your returns.
One popular approach is called Core Satellite Investing.
Imagine building a house.
I like where this is going.
You start with that foundation,
the core of your portfolio,
(08:54):
which would be like your broad market ETFs.
These provide that baseline stability
and diversification we've been talking about.
Okay, so that's like the foundation
of my investment house, nice and solid.
Then you add the satellite holdings.
These are those more targeted ETFs,
focusing on specific sectors or themes,
or even investment styles that you think are,
(09:17):
I don't know, promising.
Ah, so these are like the rooms in the house.
They had the personality and maybe a bit of excitement.
Precisely.
By adjusting your satellite holdings strategically,
you can tilt your portfolio towards areas
that you believe will outperform.
So if I'm feeling really bullish on clean energy,
for example, I could add a clean energy ETF to my mix.
You got it.
(09:37):
Or if you think emerging markets are poised for growth,
you could add an emerging market ETF.
The key is to be selective
and make sure that your choices align
with your overall strategy.
So it's all about being proactive, right?
And making those decisions
based on what's happening out in the market.
But markets change, what about those times
when you need to adjust your strategy?
You're absolutely right.
Markets are constantly changing.
(09:58):
And that's where this idea of rebalancing comes in.
Even with a really diversified portfolio,
things can drift from their original allocation.
As different asset classes perform differently over time.
Right. So even if you start out balanced,
things can get kind of out of whack.
Exactly.
Rebalancing involves periodically selling
some of your winners and then buying more of your laggards.
(10:20):
Essentially, you're bringing your portfolio back
into alignment with your goals.
It's like pruning a garden,
making sure everything stays healthy and balanced.
Perfect analogy.
Rebalancing helps maintain your desired level of risk.
And it prevents you from getting overexposed to any one area.
Okay, core satellite investing, rebalancing, got it.
Any other tricks up your sleeve?
(10:40):
What about those inverse ETFs we talked about earlier?
They can play a role in all of this, right?
They can, but they're not for everyone.
Remember, those are the ETFs designed to profit
when the market goes down.
They can be used as a kind of portfolio insurance.
Right, the profit from the downturn ETFs.
But didn't you say they were tricky to use?
They require really precise timing, don't they?
(11:01):
They do, but if you use them strategically,
they can potentially offset losses in your core holdings
during a market decline.
So it's like having that backup generator
that kicks in if the power goes out,
provides some peace of mind.
But when would I know it's actually time to use it?
That's where careful monitoring and evaluation come in.
You need to stay informed about what's happening in the market
(11:23):
and the economy and even like geopolitics.
All those things can have an impact on your investments.
So it's not a set it and forget it kind of thing with ETFs.
You have to actually pay attention
to what's going on in the world.
The market's always changing, it's dynamic.
So your strategy should evolve too, right?
Regularly review your portfolio's performance,
make those adjustments as needed
(11:44):
to stay aligned with your goals and your risk tolerance.
Okay, so stay informed, be proactive,
and don't be afraid to make changes.
Sounds like a plan.
But I'm also sensing another but coming.
Always a but, right?
And this one's important.
The reality is that no investment strategy
is completely foolproof.
Even one using ETFs, you know,
(12:06):
you can't eliminate risk entirely.
Of course, even with the best laid plans,
there are always surprises in the market.
Exactly, so it's important to approach investing
with a realistic mindset.
There will be ups and downs, the key is to be prepared.
So it's like riding that roller coaster.
But wearing a helmet and a safety harness, right?
You can enjoy the ride,
(12:26):
but you've got to be prepared for those twists and turns.
Precisely, and you don't have to do it alone.
There are resources out there
to help you make informed decisions.
Financial advisors, reputable online resources,
and even podcasts like this one
can provide some valuable insights.
Speaking of which, looks like we're just about out of time
for this part of our deep dive.
But don't go anywhere,
we'll be right back with more insights
(12:48):
on how to make ETFs work for you
in the final part of this episode.
Welcome back to our deep dive on ETFs.
And you know, as we've been talking about all these strategies
for managing risk, it strikes me that
knowledge is really the key here.
The more you understand these tools,
the more confident you'll be using them, right?
Absolutely, knowledge is power,
(13:09):
especially when it comes to investing.
The more you learn about different types of assets,
market trends, and investing strategies,
well, the better equipped you'll be
to make those smart decisions.
It's not just about picking the right ETF then,
it's about understanding the why behind it.
Why am I adding this specific ETF to my portfolio?
What role does it play in my overall strategy?
Exactly, each ETF should have a purpose in your portfolio,
(13:32):
whether it's providing that diversification,
acting as a hedge against risk,
or targeting a specific area that you think will grow.
You should be able to explain
why that ETF earned its spot.
So it's like each ETF is a player on my investment team.
And I need to understand their strengths and weaknesses.
Okay, let's say I'm feeling pretty confident
(13:53):
about my ETF knowledge now.
What are some common mistakes that people make
when they're first starting out?
One of the biggest pitfalls I see is chasing performance.
You know, it's tempting to see an ETF
that's done really well recently,
and you jump right in without really understanding
what's driving those returns.
The classic buy high, sell low scenario.
(14:13):
We've all been tempted by that shiny object.
The problem is that past performance
is never a guarantee of future results.
What's hot today could easily cool down tomorrow.
So instead of chasing the latest trends,
I should focus on ETFs that actually align
with my long-term souls.
And that risk tolerance we were talking about earlier.
Exactly, another common mistake
is just forgetting about diversification.
(14:34):
Some investors get so excited
about a particular sector or theme, right?
And then their entire portfolio ends up overloaded
with ETFs in just that one area.
Well, even if it's a basket of ETFs,
it's still putting all my eggs in one basket.
Diversification is key no matter what.
Absolutely, a well-diversified portfolio
should include ETFs across different asset classes,
(14:54):
different sectors, and even geographic regions.
This helps spread that risk and it reduces the impact.
If any one investment performs poorly.
Okay, diversify, don't chase performance,
anything else I should be watching out for.
Just keep an eye on those trading costs.
While ETFs generally have lower expense ratios
than some other investments,
(15:14):
remember that frequent trading
can really eat into your returns.
Those pesky fees.
Yeah.
It seems like they always find a way to sneak in there.
Right, so it's important to have a clear strategy
and only trade when it's really necessary
to adjust your portfolio.
Don't let those emotions
or every little market fluctuation dictate your decisions.
Okay, stay focused, stick to the plan,
(15:34):
and try not to get rattled by every little blip.
Got it.
But what about those times when I do need to make a change?
How do I know when it's the right time to rebalance?
Or maybe adjust my ETF strategy a little bit.
That's a great question.
There are a few key indicators to watch for.
One is just significant changes in market conditions.
For example, if interest rates suddenly rise sharply,
(15:55):
you might need to adjust those bond ETF holdings.
So it's like checking the weather forecast
before you head out for a hike.
You wanna make sure you're prepared
for any conditions you might encounter along the way.
That's a great analogy.
Another thing to consider is any changes
to your own personal financial situation
or your investment goals.
For example, as you get closer to retirement,
(16:17):
you might wanna shift to a more conservative portfolio.
Right, my risk tolerance and my needs
are gonna change over time.
What worked for me five years ago
might not work for me today.
Exactly, and finally, never underestimate
the value of professional advice.
A good financial advisor can help you create
that personalized ETF strategy,
one that truly aligns with your own circumstances and goals.
(16:39):
So if I'm feeling a little lost in the world of ETFs,
it's okay to call in a guide.
Absolutely, they can help you navigate
the market's complexities.
And make sure you're on the right path.
I think we've covered a lot of ground today.
We went from the basics of ETFs
to some pretty sophisticated strategies for managing risk,
and it's clear that these are powerful tools,
ones that can benefit investors of all levels.
(17:00):
But I keep coming back to that importance of knowledge.
I agree, the more you learn about ETFs,
the more comfortable you'll become
using them to reach your financial goals.
And as your knowledge grows,
so will your ability to handle
those inevitable market ups and downs
with more skill and a lot more composure.
So instead of fearing that market volatility,
(17:23):
we can actually learn to embrace it
as an opportunity to make informed decisions,
ones that could benefit us in the long run.
That's the goal.
Volatility is a natural part of the market cycle
by learning how to manage it effectively.
You can turn it from a source of anxiety
into a potential source of profit.
I love that.
It's like transforming that roller coaster
from a scary ride into a thrilling one,
(17:44):
where we actually have the tools and the knowledge
to not just stay safe, but to potentially come out ahead.
That's a great way to put it.
Investing doesn't have to be stressful.
You know, that white knuckle experience.
With the right knowledge and a well thought out strategy,
it can actually be an exciting and rewarding journey.
And on that note, we're gonna wrap up
this deep dive into ETFs.
(18:06):
But remember, this is just the beginning
of your ETF education.
Keep learning, keep asking questions,
and most importantly, keep striving
to become a more informed and confident investor.
And who knows, maybe one day you'll be the one
sharing your ETF expertise with the world.
No, that's a goal worth striving for.
Until next time, happy investing, everyone.
Okay, you know that feeling, right?
(00:01):
When the market takes a quick dip
and suddenly your stomach just drops with it.
Yeah, we all love a good bull market, of course,
but those inevitable downturns,
well, they can be pretty stressful, right?
Definitely.
So how do we make those drops a little less, well, scary?
Today, we're diving into ETFs, Exchange Traded Funds,
and how they can be a really powerful tool
(00:22):
for managing risk in a portfolio.
Absolutely.
Think of ETFs like the seatbelts,
you know, on this crazy investment roller coaster
we're all on.
Have you ever felt that, that stomach dropping feeling?
I think ETFs can really help to smooth out that ride.
They're basically a basket of different assets
like stocks or bonds bundled together,
and this built-in diversification, that's key.
(00:44):
You know the old saying,
don't put all your eggs in one basket.
Right.
But with ETFs, the basket itself,
well, it's already designed to spread out that risk.
So instead of worrying about one single stock,
you know, taking a nosedive,
I've got this built-in safety net, right?
But why is having all these different asset classes
within a single ETF so important?
Imagine you have an ETF and it holds stocks
(01:05):
from different sectors, right?
Like tech and energy, healthcare, let's say.
When tech stumbles, you know, like it did in 2022,
energy, well, that might be surging
because of global events.
Makes sense.
So holding both in your ETF,
well, it means you're not completely exposed
to just one sector.
Ah, so it's like having a diversified portfolio,
(01:27):
but on autopilot, I kind of like the sound of that,
but hold on, I've also heard that you can trade ETFs,
just like individual stocks, like in real time.
Is that true?
Absolutely.
That's actually one of the biggest advantages of ETFs.
Let's say you see tech starting to weaken a little bit,
but then energy is gaining some momentum.
You can actually sell some of that tech sector ETF
and buy more of that energy ETF.
(01:48):
And you can do it all in the same trading day.
Wow.
So it's like you can actively manage your own risk,
but you don't have to juggle all those individual stocks
and sign me up.
And this is where things get really fascinating for you.
The whole idea of advanced hedging.
Like ETFs, they offer some really cool tools here,
don't they?
They do.
Let's start with a type of ETF called an inverse ETF.
(02:09):
These are ETFs designed to move in the opposite direction
of the market.
So if the market goes down,
well, an inverse ETF could potentially go up.
Wait, so I could actually make money during a downturn?
That sounds almost too good to be true.
There's a reason I emphasize potential there.
Inverse ETFs, they use derivatives to achieve
that inverse correlation.
They require some very careful timing to get right.
(02:31):
They're not a magic bullet for sure
and definitely not a long-term strategy by any means.
Think of them more as a tactical tool
for an experienced investor.
You have to be really precise with how and when you use them.
Got it.
Precision is key.
So what about those more stable options?
Where do bond ETFs fit into all of this?
Bond ETFs, especially those holding high grade
(02:52):
or government backed bonds,
they kind of act like an anchor for your portfolio.
When stock prices are going up and down like crazy,
bonds tend to be more stable,
so they can help smooth out those bumps
for your whole portfolio.
So it's all about balancing that risk.
Having some assets move one way
and others move the other way.
OK, now I'm a little curious about these volatility ETFs.
(03:14):
They're connected to market fear, right?
But what does that actually mean?
Good question.
Volatility ETFs are actually linked to something called
the VIX, sometimes called the fear index.
It basically measures how anxious the market is
at any given time,
essentially how much prices are expected to swing.
OK.
Think of it as a barometer for how much fear is out there.
(03:35):
So when volatility is high, meaning the market's super jittery,
these ETFs tend to go up.
So it's like you're betting on fear itself.
That sounds kind of intense,
even for someone who doesn't mind a little bit of a thrill
when it comes to investing.
Who would actually use something like that?
They're definitely not for everyone,
and they can be pretty complex to actually understand.
Volatility ETFs are generally more suitable
for experienced investors
(03:57):
who really understand the risks involved.
Think of it like having a financial umbrella.
When you know there's a storm coming, not foolproof,
but potentially helpful in the right hands.
Speaking of real-world scenarios,
wasn't there a surge in those gold-backed ETFs recently?
I think I read something about inflation concerns.
Absolutely.
When inflation worries started making headlines,
(04:19):
a lot of investors turned to gold-backed ETFs,
sort of as a safe haven.
It's a classic example of how ETFs can really reflect
what's happening out in the world almost in real time.
And didn't we see something similar happen
with energy ETFs during those crazy oil price spikes?
It seemed like everyone wanted to get in on that action.
Exactly, sector-specific ETFs,
(04:40):
like those focused on energy, yeah.
They saw huge spikes in popularity
during those periods of high oil prices.
It highlights how adaptable ETFs can be, you know,
allowing investors to quickly adjust their portfolios
based on what's happening.
It's like having this super flexible toolkit
for managing your investments.
Honestly, a lot of people get intimidated
by other hedging tools, you know,
(05:01):
like options or futures contracts.
But ETFs, they seem much more approachable.
Why is that?
You're right, they are generally more accessible.
ETFs typically have lower expense ratios
compared to some other hedging tools.
And there aren't as many barriers to entry
for everyday investors.
It's like the difference between, say,
a sleek hybrid car and then a clunky gas guzzler, right?
(05:23):
Both can get you where you need to go,
but one is definitely more efficient.
Yeah, okay.
And probably more cost-effective.
So if we were to zoom out a bit,
what's the key takeaway here when it comes to ETFs?
I'd say the key is that ETFs give you options.
They empower you to navigate
the ups and downs of the market, you know,
with more control and potentially a lot less stress.
But, and this is important.
(05:44):
Hold on, I sense a butt coming.
There's always a butt when it comes to investing, right?
You got it.
And that's where we'll pick things up in part two.
We've covered a lot of ground,
but there's much more to explore.
You're right, there's always a butt, right?
And ETFs can be really powerful tools,
but they don't eliminate risk entirely, not at all.
It's about managing that risk, you know, effectively.
And that starts with understanding,
(06:06):
I guess, your own comfort level,
how much fluctuation can you actually handle
in your portfolio without losing sleep at night?
Right, because everyone's roller coaster tolerance
is different.
Some people, they love the adrenaline rush,
and then others just want that smooth scenic ride.
So how do you figure out where you fall on that spectrum?
That's where this whole idea of risk tolerance comes in.
(06:27):
It's just a fancy way of saying,
how much are you willing to lose, you know?
Once you kind of know that comfort level,
you can start building an ETF strategy
that aligns with your own goals.
Are you in it for the long-term,
that slow and steady growth?
Or are you more interested in like,
shorter-term, potentially higher risk opportunities?
That makes sense.
But I gotta admit, the sheer number of ETFs out there,
(06:48):
it can be kind of overwhelming, you know?
Where do you even begin to choose?
It definitely can be, it's like, information overload.
That's where good research comes in.
A great starting point is just looking
at the ETF's underlying holdings.
What assets is it actually tracking?
Does it align with your investment philosophy?
And that risk tolerance that we talked about.
(07:09):
Okay, so it's like peeking under the hood of the car,
making sure you understand what's actually in the ETF
before you buy it.
What else should I be looking for?
Fees are important too.
Pay close attention to something called the expense ratio.
This is the annual fee that you pay to the ETF provider,
and obviously the lower the expense ratio.
The more of your money stays invested and working for you.
(07:30):
Those sneaky fees.
Yeah.
It's like the fine print you always have to check.
But at least with ETFs,
those costs are usually pretty transparent, right?
Much more so than with some other investment vehicles out there.
You can usually find the details you need
in the ETF's prospectus.
Okay, prospectus checked.
Fees understood.
Anything else that should be keeping an eye on.
Trading volume can make a difference.
(07:51):
ETFs with higher trading volume,
they tend to be more liquid,
meaning it's easier to buy and sell them,
without those big price swings.
So it's like checking how busy the highway is
before you merge, right?
You don't wanna get stuck in a traffic jam.
Yeah.
When you're trying to make a move.
Exactly.
And finally, don't forget to consider the ETF's track record.
How's it performed in different market conditions?
(08:13):
Has it consistently met its stated objectives?
So it's like checking those online reviews
before you book a hotel.
Or try a new restaurant.
You wanna see what other people's experiences
have been like.
Exactly.
Past performance doesn't guarantee future results,
of course, but it can offer some valuable insights.
Okay, let's say I've done my research,
picked out my ETFs,
and I'm ready to ride this volatility wave.
(08:34):
How do I actually use these things to my advantage?
Now the fun begins.
Let's talk about some practical strategies.
For using ETFs to manage risk
and hopefully boost your returns.
One popular approach is called Core Satellite Investing.
Imagine building a house.
I like where this is going.
You start with that foundation,
the core of your portfolio,
(08:54):
which would be like your broad market ETFs.
These provide that baseline stability
and diversification we've been talking about.
Okay, so that's like the foundation
of my investment house, nice and solid.
Then you add the satellite holdings.
These are those more targeted ETFs,
focusing on specific sectors or themes,
or even investment styles that you think are,
(09:17):
I don't know, promising.
Ah, so these are like the rooms in the house.
They had the personality and maybe a bit of excitement.
Precisely.
By adjusting your satellite holdings strategically,
you can tilt your portfolio towards areas
that you believe will outperform.
So if I'm feeling really bullish on clean energy,
for example, I could add a clean energy ETF to my mix.
You got it.
(09:37):
Or if you think emerging markets are poised for growth,
you could add an emerging market ETF.
The key is to be selective
and make sure that your choices align
with your overall strategy.
So it's all about being proactive, right?
And making those decisions
based on what's happening out in the market.
But markets change, what about those times
when you need to adjust your strategy?
You're absolutely right.
Markets are constantly changing.
(09:58):
And that's where this idea of rebalancing comes in.
Even with a really diversified portfolio,
things can drift from their original allocation.
As different asset classes perform differently over time.
Right. So even if you start out balanced,
things can get kind of out of whack.
Exactly.
Rebalancing involves periodically selling
some of your winners and then buying more of your laggards.
(10:20):
Essentially, you're bringing your portfolio back
into alignment with your goals.
It's like pruning a garden,
making sure everything stays healthy and balanced.
Perfect analogy.
Rebalancing helps maintain your desired level of risk.
And it prevents you from getting overexposed to any one area.
Okay, core satellite investing, rebalancing, got it.
Any other tricks up your sleeve?
(10:40):
What about those inverse ETFs we talked about earlier?
They can play a role in all of this, right?
They can, but they're not for everyone.
Remember, those are the ETFs designed to profit
when the market goes down.
They can be used as a kind of portfolio insurance.
Right, the profit from the downturn ETFs.
But didn't you say they were tricky to use?
They require really precise timing, don't they?
(11:01):
They do, but if you use them strategically,
they can potentially offset losses in your core holdings
during a market decline.
So it's like having that backup generator
that kicks in if the power goes out,
provides some peace of mind.
But when would I know it's actually time to use it?
That's where careful monitoring and evaluation come in.
You need to stay informed about what's happening in the market
(11:23):
and the economy and even like geopolitics.
All those things can have an impact on your investments.
So it's not a set it and forget it kind of thing with ETFs.
You have to actually pay attention
to what's going on in the world.
The market's always changing, it's dynamic.
So your strategy should evolve too, right?
Regularly review your portfolio's performance,
make those adjustments as needed
(11:44):
to stay aligned with your goals and your risk tolerance.
Okay, so stay informed, be proactive,
and don't be afraid to make changes.
Sounds like a plan.
But I'm also sensing another but coming.
Always a but, right?
And this one's important.
The reality is that no investment strategy
is completely foolproof.
Even one using ETFs, you know,
(12:06):
you can't eliminate risk entirely.
Of course, even with the best laid plans,
there are always surprises in the market.
Exactly, so it's important to approach investing
with a realistic mindset.
There will be ups and downs, the key is to be prepared.
So it's like riding that roller coaster.
But wearing a helmet and a safety harness, right?
You can enjoy the ride,
(12:26):
but you've got to be prepared for those twists and turns.
Precisely, and you don't have to do it alone.
There are resources out there
to help you make informed decisions.
Financial advisors, reputable online resources,
and even podcasts like this one
can provide some valuable insights.
Speaking of which, looks like we're just about out of time
for this part of our deep dive.
But don't go anywhere,
we'll be right back with more insights
(12:48):
on how to make ETFs work for you
in the final part of this episode.
Welcome back to our deep dive on ETFs.
And you know, as we've been talking about all these strategies
for managing risk, it strikes me that
knowledge is really the key here.
The more you understand these tools,
the more confident you'll be using them, right?
Absolutely, knowledge is power,
(13:09):
especially when it comes to investing.
The more you learn about different types of assets,
market trends, and investing strategies,
well, the better equipped you'll be
to make those smart decisions.
It's not just about picking the right ETF then,
it's about understanding the why behind it.
Why am I adding this specific ETF to my portfolio?
What role does it play in my overall strategy?
Exactly, each ETF should have a purpose in your portfolio,
(13:32):
whether it's providing that diversification,
acting as a hedge against risk,
or targeting a specific area that you think will grow.
You should be able to explain
why that ETF earned its spot.
So it's like each ETF is a player on my investment team.
And I need to understand their strengths and weaknesses.
Okay, let's say I'm feeling pretty confident
(13:53):
about my ETF knowledge now.
What are some common mistakes that people make
when they're first starting out?
One of the biggest pitfalls I see is chasing performance.
You know, it's tempting to see an ETF
that's done really well recently,
and you jump right in without really understanding
what's driving those returns.
The classic buy high, sell low scenario.
(14:13):
We've all been tempted by that shiny object.
The problem is that past performance
is never a guarantee of future results.
What's hot today could easily cool down tomorrow.
So instead of chasing the latest trends,
I should focus on ETFs that actually align
with my long-term souls.
And that risk tolerance we were talking about earlier.
Exactly, another common mistake
is just forgetting about diversification.
(14:34):
Some investors get so excited
about a particular sector or theme, right?
And then their entire portfolio ends up overloaded
with ETFs in just that one area.
Well, even if it's a basket of ETFs,
it's still putting all my eggs in one basket.
Diversification is key no matter what.
Absolutely, a well-diversified portfolio
should include ETFs across different asset classes,
(14:54):
different sectors, and even geographic regions.
This helps spread that risk and it reduces the impact.
If any one investment performs poorly.
Okay, diversify, don't chase performance,
anything else I should be watching out for.
Just keep an eye on those trading costs.
While ETFs generally have lower expense ratios
than some other investments,
(15:14):
remember that frequent trading
can really eat into your returns.
Those pesky fees.
Yeah.
It seems like they always find a way to sneak in there.
Right, so it's important to have a clear strategy
and only trade when it's really necessary
to adjust your portfolio.
Don't let those emotions
or every little market fluctuation dictate your decisions.
Okay, stay focused, stick to the plan,
(15:34):
and try not to get rattled by every little blip.
Got it.
But what about those times when I do need to make a change?
How do I know when it's the right time to rebalance?
Or maybe adjust my ETF strategy a little bit.
That's a great question.
There are a few key indicators to watch for.
One is just significant changes in market conditions.
For example, if interest rates suddenly rise sharply,
(15:55):
you might need to adjust those bond ETF holdings.
So it's like checking the weather forecast
before you head out for a hike.
You wanna make sure you're prepared
for any conditions you might encounter along the way.
That's a great analogy.
Another thing to consider is any changes
to your own personal financial situation
or your investment goals.
For example, as you get closer to retirement,
(16:17):
you might wanna shift to a more conservative portfolio.
Right, my risk tolerance and my needs
are gonna change over time.
What worked for me five years ago
might not work for me today.
Exactly, and finally, never underestimate
the value of professional advice.
A good financial advisor can help you create
that personalized ETF strategy,
one that truly aligns with your own circumstances and goals.
(16:39):
So if I'm feeling a little lost in the world of ETFs,
it's okay to call in a guide.
Absolutely, they can help you navigate
the market's complexities.
And make sure you're on the right path.
I think we've covered a lot of ground today.
We went from the basics of ETFs
to some pretty sophisticated strategies for managing risk,
and it's clear that these are powerful tools,
ones that can benefit investors of all levels.
(17:00):
But I keep coming back to that importance of knowledge.
I agree, the more you learn about ETFs,
the more comfortable you'll become
using them to reach your financial goals.
And as your knowledge grows,
so will your ability to handle
those inevitable market ups and downs
with more skill and a lot more composure.
So instead of fearing that market volatility,
(17:23):
we can actually learn to embrace it
as an opportunity to make informed decisions,
ones that could benefit us in the long run.
That's the goal.
Volatility is a natural part of the market cycle
by learning how to manage it effectively.
You can turn it from a source of anxiety
into a potential source of profit.
I love that.
It's like transforming that roller coaster
from a scary ride into a thrilling one,
(17:44):
where we actually have the tools and the knowledge
to not just stay safe, but to potentially come out ahead.
That's a great way to put it.
Investing doesn't have to be stressful.
You know, that white knuckle experience.
With the right knowledge and a well thought out strategy,
it can actually be an exciting and rewarding journey.
And on that note, we're gonna wrap up
this deep dive into ETFs.
(18:06):
But remember, this is just the beginning
of your ETF education.
Keep learning, keep asking questions,
and most importantly, keep striving
to become a more informed and confident investor.
And who knows, maybe one day you'll be the one
sharing your ETF expertise with the world.
No, that's a goal worth striving for.
Until next time, happy investing, everyone.
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