ETFs And Investment Risk

Added October 16, 2008 by Melanie G. Rogers

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Summary: As with any investment, exchange-traded funds come with some risk. Can ETFs help you get rich quick? How risky are ETFs? What can you do to mitigate risk when investing in ETFs? John Wasik, coauthor of "iMoney: Profitable ETF Strategies for Every Investor," shares his insights on ETFs and risk.

For as long as the stock market has existed, investors have looked for get-rich-quick schemes. Some investors think the newest way to achieve fast wealth is to buy exchange-traded funds, or ETFs.

ETFs are basically mutual funds that are traded like stocks. Just as regular mutual funds hold shares of multiple companies, ETFs contain shares of a variety of companies.

But can ETFs help you get rich quick? No, says John Wasik, coauthor of "iMoney: Profitable ETF Strategies for Every Investor."

"I think that a lot of people think that ETFs are this brand-new way of getting rich," Wasik says. "They're just a more efficient way of investing. They are not a quicker or even an easier way of building wealth."

As with any investment, you should keep in mind the basics when considering investing in ETFs:

How much risk can you take?
How much risk do you want to take?
Is your profession vulnerable to the stock market?
What are your goals?

ETFs, like other mutual funds and stocks, vary in their volatility, or how much the price changes day to day.

"Some are extremely volatile," Wasik says, giving the example of a single-currency ETF, which he doesn't recommend. Instead, he says to buy index funds, such as the Vanguard Total Stock Market ETF (VTI). It has "less volatility than a single stock."

Wasik advises investors to be very aware of risk in their investments. "If you're going to invest in stocks, invest as much as you can to lower the risk profile," he says.

If you're set on finding the "next hot sector, the next Microsoft," and you focus your risk on a single sector or a single stock, "you increase your odds of losing money."

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Oct. 16, 2008.

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