The following article first appeared on RBC Direct Investing’s Inspired Investor content hub on May 8, 2018.
Nowadays, beer drinkers could spend hours wandering the aisles reading pun-laden labels to choose the perfect craft brew. At the end of it all, they may even skip the case altogether and leave with a personalized pack of single cans, each with a different flavour focus.
An ETF For Every Niche
The same can be said for today’s exchange-traded fund (ETF) investors. Scrolling through ETF offerings on the market today is nothing like it was even a decade ago, when plain-vanilla ETFs tracking major indices reigned. Today, there are around 600 Canadian ETFs, according to the Canadian ETF Association, offering access to all kinds of markets – large, small, local, global, innovative, niche. Even Hollywood is getting in on the action, with an ETF focused on music streaming — created in partnership with famed music producer Quincy Jones.
All this choice means creating that personalized pack — a portfolio — requires time, research and a plan. Luckily, you won’t be standing in a giant refrigerator while you make your decisions.
Finding the Right Ingredients
Building an investment portfolio means balancing all the ingredients to create the combination that works for you and your goals. The ingredients may include cash, stocks, ETFs, bonds, mutual funds and more.
Most ETFs are designed to track an index, although there are many specialty ETFs that provide unique active management strategies. Similar to the craft brew market, there are a number of steps involved in creating an ETF and getting it to market. Think of the ETF provider (the company selling the ETF) as the brewer, your direct investing platform (where you trade) as the beer store and you, of course, as the buyer and flavour connoisseur. The ETF provider decides on a theme for the ETF, chooses the index to track and manages the ingredients in the fund. You manage your personal investment portfolio and decide what to buy based on the available ingredients.
Different types of beer are better suited for different events — say, an easygoing, grapefruit-tinged radler for mid-summer on the dock, but a hoppy, unfiltered IPA for that cold, rainy night. Similarly, different types of ETFs are suited for different investing goals.
The number of ETF choices out there can be overwhelming, even for an experienced investor. But the guidelines that are core to investing overall can help get you on the right track if you’re trying to decide.
- Know your goals. Like any project (and investing is indeed a lifelong project), defining what success looks like is the first step. Your goals will change as your life does, and the plan can evolve. But it’s important to work toward something.
- Have a plan. As with anything, a haphazard approach rarely turns out well. Throwing hops, barley and yeast in a tank at random won’t result in a delicious brew. Same goes for adding investments to a portfolio. The plan need not be complicated. It can evolve as you go.
- Diversify. Adding a healthy mix of asset classes to your portfolio can help leave you less vulnerable to the ups and downs of one type of investment — because ups and downs in investing are inevitable.
- Do your research. Don’t like that can of craft you bought? Down the sink it might go. The risk is low — only a few dollars. Unfortunately, this isn’t usually the case with investment decisions. Before buying, it’s important to understand the risks associated with any investment. Read, ask, read some more.
Take it slow, figure out your goals and stick to them. Newbies to craft beer probably shouldn’t start with a super-strong pint with complex flavour — it’ll likely knock their socks off. Applying the same rationale to investing will help you take the right investment approach to suit your needs and knowledge.
Inspired Investor, RBC Direct Investing’s content hub, made its debut last spring on the RBC Direct Investing website. Featuring personal stories, timely information and expert insights, Inspired Investor offers clients inspiration, investment learning and how-tos – with the ultimate goal of empowering self-directed investors through content that connects with their everyday lives.
Visit RBC Direct Investing to find out more about self-directed investing.
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