We’re excited about this post because as sensational as the title is, it’s also kind of true and it may surprise a lot of you. There’s a ton of misinformation out there, some of it perpetuated by Wall Street, the media, etc. and some of it is perpetuated by an unlikely party…..YOUR PARENTS!
You read that right.
Hold on a sec, we agree that your parents would never intentionally mislead you and it’s safe to say that when they give you advice, they always have your best interest at heart. But here’s the thing…
OLD SCHOOL V. NEW SCHOOL
Lately, we’ve been getting a lot of new clients who own single stocks. When we ask who helped them start investing, it’s usually the same answer: “my parents”.
So, we’ll start by saying that it’s GREAT that they introduced you to the world of investing, we have no qualms with that. But…
There’s a better way
Back when our parents or grandparents started investing, there weren’t many types of investments to get access to the market. You pretty much used stocks for growth and bonds for stability/income. So in their defense, it understandable why they told you to buy stocks. While you’re young, it’s a great idea to make your money work hard for you and investing in the market is certainly a way to do that.
That said, in the past 20 years, there have been awesome developments in the world of investing, including the emergence of ETFs (Exchange Traded Funds – liquid, low cost investment tools). While it’s all very exciting to us finance geeks to discuss the pros and cons of ETFs vs Mutual Funds vs Stocks, etc., here’s what you need to know.
E.T.Fs in a nutshell
The risk with buying stocks is that if something completely unrelated to the company negatively affects the price of the stock (i.e. the CEO has an affair), you’re completely naked to the downside. No matter how much you believe in the underlying strength/value/fundamentals of a company, investing in the company itself exposes you to unnecessary risk.
ETFs are basically baskets of stocks. By buying one ETF, you gain access to tons of companies grouped by size, country or some other theme like Social Media.
So if you want exposure to the growth of the social media industry, rather than buying a few shares of Twitter and a few of Facebook, you can buy shares of the Social Media ETF and instantly get access to tons of companies in that space. So even if one company within the Social Media ETF does crappy, the others will help balance out the performance of the ETF as a whole.
So the next time your mom, dad, or grandpa tells you to buy a stock, tell them why you’re buying ETFs instead!