ETF Investing Guide: The 9 Advantages of ETF/Online Brokerage Investing

Compared to the alternatives offered to individual investors, buying and managing a portfolio of ETFs in an online brokerage account is compelling.

There are nine reasons why:

• It dramatically lowers your sector and company-specific risk. In combination, your ETFs form a broadly diversified portfolio with minimum sector or company-specific risk, and even reduced country risk if you diversify internationally.
• It focuses you on asset allocation, so you avoid being over-exposed to bubble-inflated assets.
• It’s really cheap. The fees on the ETFs are remarkably low, and the cost to buy and sell them in an online brokerage account (including spreads) is tiny, as long as you don’t make small purchases regularly. So you keep more of your own money.
• You get triple tax efficiency. Index funds naturally have low turnover and rarely distribute capital gains; ETFs are the most tax efficient form of index funds; plus, on top of that, creative tax-loss selling of ETFs further lowers your tax bills, and can even result in a multi-year tax deduction.
• Your funds should match their respective markets (because they’re index funds). And that’s more than you can say for the vast majority of mutual funds over long periods of time.
• Portfolio rebalancing means you should beat a simple buy and hold strategy, and certainly most attempts to time the market. Many investors feel confident when the market rises (so they buy high) and panic into selling when the market falls (so they sell low). In contrast, your rebalancing rule leads you to buy low and sell high.
• Investing is no longer an emotional roller coaster. You no longer have to make decisions when the market moves. Your rebalancing rule takes care of that for you, and you have the confidence that over time, portfolio rebalancing should be profitable.
• Investing becomes really easy, and not time consuming. Selling all your individual stocks and funds should take a few hours at most. Setting up an online brokerage account with a linked online money-market bank account should take half an hour. Entering the orders to buy the initial ETF portfolio should take 40 minutes. And rebalancing your portfolio and tax-loss selling can be done in an hour once a year in December, or - only if you wish - more frequently.
• Your finances become generally easier to manage. Now you can aggregate all your assets in one place, and measure and manage them easily. By linking your taxable and retirement brokerage accounts to your bank accounts and managing them all online, you can maximize the interest you earn on cash, see all your assets in one place, and make it easier to manage your finances.

Bottom line: for both the average and the wealthy investor, purchasing and managing a portfolio of ETFs in an online brokerage account is cheaper, less time consuming, less stressful, and should perform significantly better than the alternatives.

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