Many people tend to look for shortcuts when investing and often turn to Exchange Traded Funds (ETFs). ETFs are low priced investment funds traded on stock exchanges that track the performance of the overall financial market or parts of the market. Many believe that ETFs are a promised shortcut because they mirror the market at a low cost, but that is one of the many incorrect assumptions made about this type of investment. Money managers that use ETFs peddle the idea that your returns are going to be equivalent with the stock market’s, but this notion is wrong most of the time because of two main reasons: fees and timing.
These stock market-mirroring ETFs are called index funds. Index funds mirror specific markets, such as the S&P 500 or the Dow Jones Industrial Average and have low fees associated with them thus creating the illusion of a shortcut. Although index funds have small fees, their returns are slightly less than the market because their fees quickly pile up. There is a manager that handles the money in the ETF, so there is a fee charged by the manager of the ETF. This fee is taken out of the price of the ETF, so you do not get a bill for the ETF management fee. The investment advisor that manages your money by exclusively using index funds also charges a fee on top of the index fund’s fee, which at best, gives you the market return minus the index fund fees minus the management fee. But fees are not the only component that diminishes your return.
Timing is a recurring issue when it comes to portfolio management. Many life events can result in you either selling or buying investments and the price you buy and sell your investments for determines the return you’ll receive. Bad timing by those who do not understand the psychology behind investing can take a toll on your returns. Additionally, selling only because your investments decreased in value can negatively impact a long-term investor’s returns. These timing mistakes are a big reason why investors often receive a different return on their index funds than the market. Although they were promised returns on par with the market, they end up underperforming the market if they fall subject to biases that most people have, further proving that there really is no shortcut in investing.
At Fogel Capital Management, Inc. we understand that there is no shortcut when investing. Our team comprised of former Wall Street professionals are equipped with the tools and knowledge to predict market behavior and how to implement the best plan of action. We take pride in being prepared for the unknown and avoid the pitfalls of exclusively investing in ETFs. Call 772-223-9686 to schedule a free portfolio consultation or to learn more about our market knowledge.