How to Choose ETFs Suitable for Your Investment Objective

To choose ETFs which fit your investment goals and risk tolerance is crucial to your successful financial life. This article share with you what factors you need to consider when you make your decision on ETF trading.

The following investment questionnaire determines your model portfolio.  It could be applied to your 401k, IRA, and other investments as well.

Investment objectives and goals: choices could be growth, conservative growth, income and growth, capital preservation, etc.

Time horizon (your age) is the most crucial factor in your risk tolerance model. When do you expect to start withdrawing from your portfolio? How soon do you need to access the liquidity? These are the two most important questions you need to answer regarding risk tolerance.

Risk tolerance: this means what degree of investment loss you can tolerate. Is it very high, high, moderate, low, or very low? Do not count your chickens before they hatch. When you plan to trade on ETFs, ask yourself how much you can afford to lose if things go wrong, instead of how much you are going to make. Be aware of risk.  Also, be mindful of “event risk.” This is the risk of an unforeseen occurrence, from a political assassination to a tsunami, playing havoc with the markets.

Liz Weston said, “Risk is part of life.  While you can’t avoid it, you can make sure the risks you’re taking are appropriate for your goals.” This is from her book, The 10 Commandments of Money (page 86).

Ali Velshi has formulated very detailed descriptive model portfolios. He accomplishes this with investment questionnaires and choosing the right types of funds with appropriate risk level. His book is Gimme My Money Back (page 125-134).

As investors, when we buy ETFs we pay the asking price, when we sell we pay the bidding price.  If an ETF has a small trading volume, we might pay a high bid-ask spread, and then add the trading cost. To avoid this scenario, we suggest investors choose ETFs with higher liquid and larger asset values.

After the portfolio model has been established, investors are ready to choose ETFs based on direction (either Bull or Bear), and risk appetite (1X, 2X, or 3X) .

There are a multitude of choices among ETS, based on risk tolerance and the direction of the market.

Currently, plenty of resources allow you to filter products, choose asset categories, select Bull ETFs (1X, 2X, and 3X based on underlying securities’ return), and Bear ETFs (-1X, -2X, -3X reversed to underlying securities’ return). You can follow these websites as reference:

Invescopowershares.com

Proshares.com

Direxionfunds.com

Bloomberg.com

 

Thanks for your visiting and reading.