5 Apr 2021, 09:51
There are times when the stock market is rising furiously, and you just wished you could scoop up every stock riding the bull market. Imagine how much money you could have made from spotting this upward move? In a rising bull market, most stock prices will rise with it.
So, what’s the catch? You would need lots of money to do so. Owning every stock in the market is just out of the question for most of us and there is a limit to how much we can buy. Doesn’t it feel frustrating when you miss out on so much potential profits? Well, what’s the next best thing you could do?
What are Indexes and ETFs?
Early investors devised a clever way of tracking the performance of the stock market or sectors through indexes. Indexing is a way of grouping a set of similarly themed stocks into a portfolio to track the group’s collective performance. In Singapore, we have our very own Straits Times Index (STI).
However, there was just 1 glitch. You cannot technically trade the index itself. That’s why you need an Exchange Traded Fund (ETF) to do so. An ETF is basically like a stock that is listed on the stock exchange. What an ETF tries to do is to mirror the performance of the index it is tracking. Instead of buying every stock in the index, you just need to buy shares of a single ETF and you will practically “own” every stock in that index.
Hence, an ETF is an investor’s dream of diversification. Instead of paying a large management fee to fund managers, you merely pay a small management fee (approximately 0.09% for S&P 500) for buying one ETF. Just like any other stock, you earn returns through its dividends and capital gains. That’s not all, you can also choose to buy or sell anytime with no lock in periods.
What is the benefit of diversification then?
Unlike owning individual stocks, you can “spread out” your risks as you are effectively “owning many different stocks” through the ETF. A stock owner is subjected to all the risks of that single stock. For example, if the stock suffers from a drop in price, his portfolio value will decrease together with it. This is not necessarily so for an investor holding an ETF.
Within the ETF, if just one of its stock within its portfolio suffers a price drop, the ETF does not necessarily fall together with it. That is because there are other stocks within its holdings that could rise in price and help to mitigate the impacts arising from that particular company that isn’t performing well. Therefore, you can count on the “good” stocks in the ETF to prop up that one particular “bad” stock. Hence, in this scenario, the investor may not necessarily see a drop in value of his portfolio.
ETFs and Technical Analysis
Most of the time, the price of ETFs tends to travel together with the overall trend of the stock market. In a rising bullish market, most of the stocks within the ETF should also be travelling together upwards. The few “bad” stocks should have negligible impacts on the ETF.
Like stocks, we discovered that ETFs also have very reliable technical analysis chart patterns. We found out that ETFs work very well on chart patterns and we have successfully used chart patterns to identify precise entry points to maximize our profits. This way, our improved version of Dollar Cost Averaging is to accumulate assets not every month but based on technical analysis.
Refer to our example below where we identified an entry point for an ETF. Fret not if it looks confusing to you! There will be articles and masterclasses so that you can identify them too.
Silver Vault Package
We understand that some investors may not like to invest in individual stocks due to inherent risks. An effective alternative way would be to invest in ETFs as a diversification strategy and our Silver Vault package is designed for such investors in mind.
If you would like to add ETF investing to your portfolio, you may like to find out more about our Silver Vault Package.
Quick summary for you to digest
1. Exchange-traded Funds (ETFs) are individual securities listed on the stock market.
2. They track a specific market index or sector through the type of stocks it holds.
3. ETFs give you an easy option for diversification purposes.
4. ETFs tend to follow the trend of the overall market.
5. The main benefit of diversification is that you can spread out your risks.
6. Own an ETF is like owning the many stocks within its holdings.