Description
Transcript
Investing in the stock market can be an exciting way to grow your wealth over time.
But, market volatility can make even seasoned investors understandably nervous about their investment.
However, there may be a solution to help reduce the effect of volatility exposure: Exchange-Traded Funds or ETFs.
As we learned in previous lessons, ETFs can offer many benefits to investors including diversification, low fees, and flexibility.
When it comes to investing during market volatility, ETFs can be particularly useful.
Additionally, many ETFs can provide exposure to sectors that may help mitigate portfolio volatility such as bonds or commodities.
By including these types of ETFs in your portfolio, you can reduce the overall volatility of your investments.
Additionally, here are two key ETF investing strategies that may also help mitigate your portfolio’s volatility: Rebalancing and dollar cost averaging.
Let’s take a closer look at each one.
First, let’s talk about rebalancing.
It’s a simple and effective way to adjust your portfolio to help stay in line with your investment goals and risk profile.
When your portfolio is unbalanced, it doesn’t meet your initial allocation you established based on your goals, time horizon, and risk tolerance.
To restore balance you can sell some investments and use that money to buy other investments, returning your portfolio to its original allocation.
For example, let’s say that you have a target allocation of 60% stocks and 40% bonds.
If the stock market experiences a sharp decline, your allocation may shift to 50% stocks and 50% bonds.
Rebalancing would involve selling some bonds and using the proceeds to buy more stocks, bringing your allocation back in line with your target.
The second strategy is dollar cost averaging.
In times of market volatility, it can be tempting to sit on the sidelines and wait for things to stabilize, but that approach can lead to missed opportunities.
This is where a strategy like dollar cost averaging comes in.
It’s the process of investing a consistent amount of money over time, meaning when the market declines your fixed dollar amount buys more shares, and when the market rises your fixed dollar amount buys fewer shares, which lowers the average cost of each share potentially leading to higher returns.
So, where do ETFs come in?
By investing a fixed amount into just one ETF every period you are investing in the ups and downs of entire indices like the S&P 500 or industries like technology.
Plus, with fractional shares you can invest an amount you’re comfortable with.
And there you have it: these strategies, combined with the power of ETFs, can allow you to sail through market volatility with confidence .
Next up, we’ll teach you how to invest thematically through ETFs.
See you there.
eToro encourages its customers to carefully consider the funds’ investment objectives, risks, and charges and expenses carefully before investing. This and other information can be found in the funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting each fund company’s website or www.sec.gov/edgar/search. For iShares funds please visit www.iShares.com/prospectus. Read the prospectuses carefully before investing.