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A Diversified Portfolio Should Take Risks, But Not a Lot

Subhash Juneja writes, in part,

"ETFs are the best friend of small investors...."

Exchange Traded Funds (ETF) are usually not for "small investors" as you suggest. Typically, an investor needs to drop ten grand into an ETF to overcome fee based erosion of investor equity. Ten grand is not an insignificant amount of money.

An ETF is a safer investment when markets are stable. We do know today's markets are far from stable. An example is an ETF based on the financial sector has lost an average twenty-five percent in equity value.

While an ETF provides a loss cushion through specific sector diversification in securities holdings, should an entire sector suffer losses across all related securities, ETF losses can be multiplied by extreme losses for specific securities within an ETF portfolio. This is well exemplified by my financial sector losses previously cited. A more specific example is being vested in an ETF which contains Bear Stearns in the securities mix.

An ETF will almost never exceed average index growth in a specific sector. Through diversified holdings there will be, inherently, some securities which lose value contrary to overall average growth of a sector. Potential for ETF growth is almost always slightly less than an index average. Savvy and seasoned investors usually can well outperform an index average. However, individual investing does require a lot of research and time, to be successful.

During times of market stability and growth, an ETF is a very good choice for those who want to assume less risk in the markets and need to have others decide which securities to buy and how much diversification is needed for acceptable growth and lower risk.

Contrasting this, during times of market instability, such as now, an ETF can be amongst the most high risk investments made. This risk is concentration of investment in specific sectors such as the financial sector or the precious metals sector.

There are advantages and disadvantages with these “exotic mutual funds” we know as Exchange Traded Funds. Rather than launch into a lengthy discussion of ETF basics, my sincere suggestion is readers spend a lot of time carefully researching ETF basics to determine if an ETF investment or ETF trading is best for you and your individual needs.

Always keep in mind when a person promotes a certain investment strategy, this is almost always done so for self-interest reasons; those of Wall Street are certainly not your friends.


Okpulot Taha
Choctaw Nation