ETF’s (exchange traded funds) are the fastest growing investment vehicle right now. And there a good reasons for this. Whether you are investing through your Roth-Ira or playing the stock market with a brokerage account, you might want to consider investing in ETFs. ETFs are one of four main ways to invest in stocks, the other three are individual stocks, mutual funds and index funds. Let’s dive into the details.

So what is an ETF anyway?

ETFs are extremely similar to mutual funds. The most notable similarity between ETFs and mutual funds is that both are made up of numerous market stocks. Conventional mutual funds do not trade throughout the day, whereas ETFs do. Why would you care? Well, it gives you an added degree of flexibility to trade throughout the day. With a mutual fund, you can only make a move at the end of the closing day. With an ETF, you can trade stock at any time you choose while the market is open.

On fees for ETFs…

Although ETFs charge a management fee, fees for ETFs are significantly lower than mutual funds or even index funds. Look into mutual funds and you’ll start to realize the exorbitantly high fees. With an ETF, it’s typical to only pay between .1% and .7% of your total assets. This is music to an investor’s ears if he/she is “cost conscious.” Personally, I am fundamentally opposed to paying fees higher than .5%. I mean, think about it, you wouldn’t want to throw money down the drain would you? Over the long haul, fees can nickel and dime you, and eventually take a significant portion of your retirement portfolio. ETF’s are also more tax efficient than mutual/index funds.

Greater investing flexibility.

Unlike most index funds or even mutual funds, ETFs do not require an initial investment. This is a selling point, especially for young investors. I, for one remember being in college and wanting to invest and realizing that most investment choices required an initial amount. As an example, the index funds that I hold within my Roth-Ira require an initial investment of $3,000. As a poor college student, it’s hard to meet this initial requirement. That’s where ETFs come in.

Diversify, diversify, did I mention diversify?

You can pick up a couple ETFs and cover all your market segments. You can protect yourself as well as make some solid gains in the market. For example, you can split $1,000 across large cap stocks, small caps, emerging markets, REITs and bonds. You pay a nominal fee for this exposure and flexibility. Unlike a mutual fund, you can control overlap within your ETF choices.

So, where can I buy ETFs?

Pretty much anywhere really. Whether it’s a Roth-Ira, 401k, individual broker account, it’s up to you. I recommend Vanguard for starting out with your ETF investment purchases. Vanguard offers unlimited free trades for ETFs, so this is a no-brainer. Sharebuilder, TDAmeritrade, and TradeKing are also great choices. Although ETFs are a great investment choice, make sure to do your own research. Go with reputable funds with long standing performance and low fees.

Say hello to one of my heroes, Rick Ferri. He is known for advocating passive investing and ignoring the ups and downs of the markets. He speaks truth, 2/3 of mutual funds pale in comparison by a well diversified, passive portfolio of index and ETF funds. Actively managed mutual funds are bunk. It amazes me how many people still buy mutual funds. Not only are they more expensive to own, but they also have a high turnover rate.

Check out this wisdom!

Happy Investing fellow readers!

This post was inspired by conversation I’ve been overhearing at work, from friends, from family, and from random people I meet on the street. Much of the conversation has been about the state of the economy and volatility. They are scared about entering the market again and are debating whether or not to just keep their cash in their low yield savings accounts. I feel your pain fellow Americans! It’s a tough time out there but that is not an excuse to miss out on market gains! I totally understand people’s hesitation, but it’s ALWAYS a great time to enter the stock market. Wellll, if you’re in it for the long haul that is haha.

To be honest, if you can’t stomach the volatility of the market, it might be better to wait it out. But for those interested in jumping back in, I highly recommend it ONLY if you follow some common sense advice. First and foremost, make sure you have an emergency fund that is fully funded to cover 6 months of expenses for you and your family. The next step is to take a little risk. No risk, no reward, that’s life.

But, you CAN manage your risk and create a nice cushion should the market fall. This “cushion” is created through a diversification of funds. I don’t recommend individual stocks, especially if you’re one who is scared about entering the market again. You should invest through low cost mutual funds, ETF’s, or low cost index funds. Although these options are diversified for you, you should take some levels of volatility into consideration.

Remember, as an investor, you want to be compensated for taking risk. Here are four levels of volatility that you should consider depending on how “risky” you’re feeling.

HIGH VOLATILITY:

Foreign companies

Growth funds

Micro-cap funds

International funds

Emerging markets

sector funds

Penny funds

Precious metals

Commodities

MEDIUM VOLATILITY:

Large cap stocks/funds

Mid-cap stocks/funds

High-yield bonds funds

Any ETF/index/mutual fund that tracks SP500

Any ETF/index/mutual fund that tracks Dow Jones

Any ETF/index/mutual fund that tracks Nasdaq

LOW VOLATILITY:

Short term corporate and government bonds

Intermediate and long term corporate and government bonds

US savings bonds

Treasury bills

Low risk mutual funds

EXTREMELY LOW VOLATILITY:

Savings accounts

Money market deposit accounts

Checking accounts

Certificates of deposit

So now that you know various investment choices, how do you know which ones to choose? That’s the easy part. I like to keep things simple and make my investment choices depending on age. If you’re young like myself, I recommend 90% of your portfolio be comprised of higher risk stocks and funds, while 10% is invested in relatively low risk choices like US bonds. If you are close to retirement and have been saving all your life, then these percentages will be flipped. You will want anywhere from 80-90% of your portfolio be in low risk investments such as bonds and savings accounts to ensure that your money is safe during retirement. It’s as simple as that folks!

If you’re just starting out, you should create a portfolio consisting of investments from all four levels of volatility risk. And remember to not make a newbie mistake and put your emergency fund in stocks! Keep that safety cash in a liquid state at your local credit union or bank.

Until next time!

-JE

I talk to quite a few people that have begun taking baby steps by budgeting and figuring out where their money is going. But they get to that point and get really confused on what to do with it. To be honest, I’m not surprised. With all the Jim Cramers, Suze Ormans, and CNBCs out there, I totally understand why people are unsure about where they should put their money? The mass media will try hard to confuse you in hopes of you going after the next “best thing.” That’s the worst thing you could do. I mean, after all, you did budget and save this money, so you should be very cautious where you invest it, right? Through my years in college, I made my fair share of mistakes, but through those tough experiences, you can learn from then so you don;t have to make them like I did. I have compiled a 10 item list in order of where you should put your money first:

1-Debt sucks, pay off all high interest debt before doing anything else. This is in reference to high interest credit cards. Destroy your debt! Remove it from your vocabulary!

2-Fully invest in your employer’s 401(k) program. You can’t beat free money if they match you to a certain percentage.

3-Create an emergency fund for at least 4 months. This is to cover your butt in times of crisis such as periods of unemployment, car repairs, and unexpected travel expenses.

4-Fully fund your ROTH-IRA. I recommend Vanguard for this.

5-If you have more money to invest, open a taxable discount-brokerage account and purchase ETFs, NOT INDIVIDUAL STOCKS! I recommend TradeKing for this.

6-Ensure that you have above average coverage for health/dental/disability/life insurance.

7-Pay down low-interest loans such as cars and school loans.

8-Start a separate savings account for a down payment on a house.

9-Pay down your mortgage.

10-Save for future children. Kids are expensive, start planning now!

If you disagree with my order, please comment below and put this list in a different order. I’d love to hear another person’s opinion on this! Hope you enjoyed this article. I will be posting up articles on each of these topics in more detail in the coming months ahead.

This is a great opportunity for anyone interested in delegating more of your work, so you have more free time to do the things you love! For a limited time, Tim Ferriss is offering unlimited free copies of his two books, “4-Hour Workweek” and “4-Hour Body.” 4-Hour Workweek is geared toward a business focused individual. If you’re thinking about starting a business or run one now, this book will provide you with some much needed insight into the topic of delegation of work. he covers topics such as work delegation, strategic email responses, and hiring virtual assistants from India. 4-Hour Body is a fantastic cook book for someone on a low-card, high protein diet. He’s got some great, new ideas in there for recipes. If you’re like me, you get tired of eating chicken grilled on the George Foreman!

-Click on the image below.

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-Fill the form out. You can use a fake email address if you want.

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(Just a heads up, this offer expires on the 26th)

ENJOY!

-JE

Here are 10 commandments for wealth and investing from Money Talks News and my responses to these ten commandments. Enjoy!

1. Thou shalt live like you’re going to die tomorrow, but invest like you’re going to live forever. In short, enjoy your life to the fullest every day â“ live like you’re going to die tomorrow. But since you’re probably not going to die tomorrow, plant part of your money in quality stocks, real estate or other investments; then hold onto them.

2. Thou shalt listen to thine own voice above all others. When you hear someone promising a simple solution to a complex problem, stop listening to them and start listening to your own inner voice.

3. Thou shalt covet bad economic times. Wealth is created when times are bad, unemployment is high, problems are massive, everybody’s freaking out, and there’s nothing but economic misery on the horizon.

4. Thou shalt not work. When it comes to work, you should try to do something that you regard as so fulfilling that you’d do it even if it didn’t pay anything.

5. Thou shalt not create debt. Paying interest is nothing more or less than giving someone else your money in exchange for using theirs. Rule of thumb: To have as much money as possible, avoid giving yours to other people.

6. Thou shalt be frugal â“ but not miserly. The key to accumulating more savings isn’t to spend less â“ it’s to spend less without sacrificing your quality of life.

7. Thou shalt not regard possessions in terms of money, but time. You go to the mall and spend $150 on clothes. But what you spent isn’t just $150. If you earn $150 a day, you just spent a day of your life.

8. Thou shalt consider opportunity cost. This is related to the commandment above. Opportunity cost is an accounting term that describes the cost of missing out on alternative uses for that money.

9. Thou shalt not put off till tomorrow what thou can save today. Fortunes are rarely made by investing big bucks, nor are they often made late in life. Wealth most often comes from starting small and early.

10. Thou shalt not covet thy neighbor’s stuff. Decide what really makes you happy, then spend â“ or not â“ accordingly. When your friends make an impressive addition to their collection of material possessions, be happy for them.

Here’s my take on these:

1. Work-life balance is key to financial success as well as a high quality of life. Hold onto your investments and invest on a regular basis. Keep a big picture of your financial goals.

2. I read various blogs and financial papers, but when it comes down to it, I trust my gut with my personal finances. And it’s turned out really well so far.

3. When the market crashes, buy buy buy! Most say market timing doesn’t work, I disagree. Market crashes, you invest, seems simple to me.

4. Do what you love. Studies have shown this is how you maximize your earning potential. Excel at something you’re naturally good at. Simple as that.

5. Debt sucks, just don’t do it (unless it’s for a house).

6. “The key to accumulating more savings isn’t to spend less â“ it’s to spend less without sacrificing your quality of life.” I like this way of thinking.

7. Before a purchase, do some quick math to see how many hours you would need to work to buy the item. This has helped me avoid many stupid purchases.

8.Opportunity cost is everything. Could you get more out of your dollar buying/investing something else? Food for thought…

9. Yup, time is on your side. The sooner you invest, the higher your returns will be in the long run!

10. Ignore your neighbors. Focus on saving more than you spend, regardless of what other people are doing around you.

-JE