When exploring the stock market, it’s natural to make the safest moves possible for your money. ETFs are a great way to create a solid, generally safe portfolio. With the help of financial experts, ETFs will allow your money to gain momentum through tiny adjustments. While diversifying your portfolio is good for managing risks, it’s best not to go overboard with it.
ETFs are naturally diverse investments—they combine multiple assets, after all. Experts advise owning anywhere between 6 and 9 ETFs if you hope to create even greater diversification across numerous ETFs. Any more may have adverse financial effects.
Once you begin investing in ETFs, much of the process is out of your hands. Before making that move, however, read on to learn more about the diversification process and exactly how many ETFs you can take advantage of.
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Do You Need To Diversify ETFs?
When looking at stocks, you’ve likely heard the advice that it’s wise to diversify your investments. How does this same advice apply to acquisitions of ETFs?
Each ETF is fully diversified, being made up of various stocks and other investments. However, it can be wise to create diversification across several ETFs, and it’s not unusual to develop entire investment portfolios of only ETFs.
Diversification Across ETFs
To diversify a portfolio means to place money in various types of stocks, bonds, or other investments. In doing so, you can protect the value of your money by ensuring that if one of the stocks within your investment dropped, there would be others available to pick up that slack.
ETFs are generally considered well-diversified in their own right. Though some ETFs may come with an expensive tag, most investments are passive enough that financial institutions charge a low fee to manage them.
What’s more, you can easily view that diversification yourself. ETFs offer great transparency through many organizations, including Charles Schwab, allowing investors to track their adjustments and see exactly where their money is going.
This takes much of the effort of diversifying your portfolio out of your hands. If you wish to stake a more direct claim over your diversification, you can create further diversification by looking into owning multiple different ETFs. For example, if you already own a retail intensive ETF, you might consider adding another focusing on real estate instead.
The security offered by ETFs is enough that many people choose to invest solely in ETFs, forgoing the option of stocks or mutual funds altogether!
An All-ETF Portfolio
By investing all your money into several different ETF funds, many hope to remove themselves from the investment process and take full advantage of this service. Doing so, however, comes with both advantages and disadvantages. I will discuss this further, so keep reading.
You Can Increase Security for Your Money
In placing all your money in ETFs, you are putting all of your eggs in a very safe basket. Financial experts can manage your funds in a way that allows your money to grow at a steady, if somewhat slower, rate.
If you find yourself intimidated by the idea of handling your own money– no shame, many people are– then you may enjoy the relief of knowing that your money is in the hands of experts.
Because ETFs contain more investments than just stocks, you have a wide range of options through owning all ETFs. Stocks are a great way to get started, but it’s the unique combination of bonds that gives ETFs their famous stability.
You Don’t Get Full Control Over Your Money
While an all ETF portfolio may help those worried about handling their own money, it can be a pain for those who desire more control. Part of the fun of investing comes from following market trends and learning as you go; if your entire portfolio is made of nothing but ETFs, you’ll miss out on a great deal of what many come to love about investing.
An all ETF portfolio is a great way to save in the long run, but it comes with some expenses in the short term.
Every actively managed ETF costs the consumer a fee. This fee is usually minimal, but if you choose to place all your money in several different ETFs, you may find that these multiple fees can build up faster than you expected.
How Many ETFs Should You Own?
Whether you plan on creating an all ETF portfolio or maintaining a bit more control over your money, it can still be valuable to know how many ETFs you should look into investing in.
Experts suggest owning between 6 and 9 ETFs to take full advantage of ETF benefits without suffering too many of their disadvantages. While ETFs are a great way to grow your money, investing in more than 10 ETFs isn’t a wise idea.
The only real issue associated with owning too few ETFs is that you won’t be able to take full advantage of the long-term stability they offer. Owning too many ETFs can lead to much more complicated issues.
Why Owning Too Many ETFs Is Not Ideal?
ETFs are designed with the long game in mind, making them ideal for many different retirement funds. As people move through their lives, collecting various retirement funds, they can easily find that they’ve developed multiple different ETFs through various organizations.
The average person has an average of 12 jobs throughout their life. According to Torsten Slok, an international economist for one of Germany’s most famous investment banks, many people can find themselves with as many as 6 different retirement accounts due to the natural fluctuations of life!
As opposed to what many pop songs claim, more money rarely equals more problems. When you have this number of ETFs spread across many financial institutions, it can create several issues:
You Lack Diversification
When multiple sources control your ETFs, there’s no way to tell what exactly those ETFs are invested in cohesively. This lack of communication makes it highly likely that, even though you think your accounts are diverse, you may have multiple versions of the same stock repeated in every ETF account!
By combining all your ETF investments under a few major accounts, you allow one person or organization to better control where exactly every dollar you’ve invested is going.
You’ll Have To Pay Additional Fees
Each financial institution offers its own rate. When your portfolio depends on too many ETFs controlled by too many people, you put yourself in a position to pay fees to a number of different sources. As I’ve mentioned before, these fees may seem small in isolation, but they can become poor financial decisions if allowed to snowball.
It Can Lead to Ineffective Long-Term Planning
Remember, the entire point of an ETF is to create a long-term safety net, frequently intending to prepare you for retirement.
If you’ve ever attempted to create long-term plans with a massive group of people, you know how difficult it is when people can’t see eye to eye. By placing your money in the hands of so many different individuals, you are removing the advantage of having a singular, unified, long-term plan for your investments.
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Conclusion
Account diversification is almost always a positive thing. By creating a well-diversified pack of ETFs, you are placing your money in a safe, secure position to grow over the long term. This plan only works, however, as long as you keep that long end goal in mind.
When it comes to ETFs, it’s a marathon, not a race. Don’t allow your accounts to run rampant, restrict yourself to between five and ten ETFs, and trust the experts to do what they do best.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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