ETF vs. Mutual Fund

[kork13]

Why do you need 9 different ETF's? Why not stick with 3?

This was in a bid to enable better market diversification. The 3 MF's are currently an S&P index, extended market index (mid-/small-cap), and GNMA (gov't-backed mortgage bonds). The 9 ETF's were broken out by large-cap growth, large-cap value, and small-cap US equities, large-cap, small-cap, and emerging market international equities, and short-term, med-term, and TIPS treasuries.

I've pretty much decided to stick with the MF's for now, primarily for simplicity's sake in contributing additional money in the future. From what I can tell, it's impossible for me to make automatic ETF buys, so I'm just going to stick with MF's until I have more time/patience to devote to investing. I've already started pulling the cash from my various accounts, and put 2/3 of the total amount in. Later today (once it's the 15th in the states), I'll finish up and put the last 1/3 in. The lump sum made sense based on what you all have explained. I wish that I could acheive the diversification of the ETF's with the simplicity of the MF's, but alas, it's just not the case at the moment (at least, not without eating double and triple the expenses).

[kork13]

A related thought...

I just mentioned abaove that I've started pulling the cash from my accounts to load into my MF's... I realized as I was doing that just how much money I'm talking about here (does anyone else sometimes separate the number in your bank account on the computer screen from physical dollar bills and the value that it has?) -- until the MF buys execute, I've got about $16k sitting in my checking account at the moment, with another $4k on the way from external accounts. I realized last night, that's enough money to completely pay off a "career starter" loan I got coming out of college -- originally $30k, now down to about $17.5k. The mitigating factor here is that it's only at a fixed 1% interest rate. So as I looked at my accounts setting everything up, I literally had to take a couple minutes to remind myself that in the long run, I'm doing better by investing the money. However, it was a SIGNIFICANT temptation to just pay it off and be done with it. That would be $520/mo freed up in my budget. But no, the investments can do better for me over the long haul, which is exactly what I'm in for right now. It actually really surprised me how tempting it was to totally pay it off in one fell swoop -- definitely an emotional reaction, which I was able to temper with logic/reason, but it surprised me all the same...

[tulog]

You need to be careful with using ETFs as long-term investments. ETFs are short-term investments only. ETFs have decay. An ETF with a .50% decay will go to no value in 100 years.

Use ETFs only for short term trading opportunities. Use common stock for long term investments. You can invest into the same common stock that the ETF holds, in proportional amounts.

[tulog]

I think OP is talking about investing, not trading...

ETFs are short term trading vehicles only. Thus the name, exchange traded fund.

He is mixing things up. You do not use ETFs for long term investment, but only to take advantage of short term market phenomena. For example, if you believe the S&P 500 is undervalued but will change prices in the short term, then you buy an S&P 500 ETF and sell it once the price change you expect occurs.

Using an ETF for long term investing is bad because of ETF decay, and the greater market and non-market risks of ETFs.

[tulog]

it's only at a fixed 1% interest rate...

This is almost free money. Take all the 1% loans you can get. Invest into common stock.

I have made 684% this year on common stock, and one ETF.

[gambler2075]

This is almost free money. Take all the 1% loans you can get. Invest into common stock.

I have made 684% this year on common stock, and one ETF.

Yes, but this year was atypical... what you are prescribing is absolutely reckless... you should never take out a loan and buy stock... imo that is crazy, and also probably illegal.

Advising non traders to go into the markets and do battle with the big boys is like telling a 6 year old who won his first judo match to get in the octagon and fight Randy Couture...

g

[tulog]

Yes, but this year was atypical... what you are prescribing is absolutely reckless... you should never take out a loan and buy stock... imo that is crazy, and also probably illegal.

Advising non traders to go into the markets and do battle with the big boys is like telling a 6 year old who won his first judo match to get in the octagon and fight Randy Couture...

g

I didn't tell him to trade, I told him to invest. If he loves that particular ETF, he will approximate its performance by doing what I advised him to do, invest into common stocks composing the same proportional composition of the ETF holdings. Furthermore, that approach will have less market and non-market risk than investing into the same ETF which has decay.

[gambler2075]

I didn't tell him to trade, I told him to invest. If he loves that particular ETF, he will approximate its performance by doing what I advised him to do, invest into common stocks composing the same proportional composition of the ETF holdings. Furthermore, that approach will have less market and non-market risk than investing into the same ETF which has market decay.

Dude (you are a dude, I am assuming),
taking out a loan under any circumstances to buy a stock is, well, ridiculous.

g

[tulog]

Well thats an opinion. Would like to see your factual analysis.

1% is very cheap money.

[gambler2075]

Well thats an opinion. Would like to see your factual analysis.

1% is very cheap money.

Well first I don't know why I am getting sucked into this debate but I'll bite...

OK. First of all, we know that most people who attempt to try daytrading fail miserably. And most people give up before they ever get profitable.

Yes, there are some traders who are clearly profitable, and for extended periods of time... Johnwelshphd is an example.

Now, as far as your 684% gain, of course that is great... how many trades was that? If you tell me something ridiculous like "1" then I would say "how do you know you weren't just lucky?"

As far as facts go, take a look at this

Investor Home - Do Day Traders Make Money?

the majority of traders lose money. So you are advising someone who probably has no trading experience (like the vast, vast majority on this forum) to borrow money and try to trade? That is unbelievably irresponsible...

Sure, YOU may be profitable. YOU may have a track record. That's fine... but for you to essentially advise non-traders to try this is crazy.

I don't trade on margin... I don't borrow money to trade... I suppose I COULD but without years of experience (and even in spite of years of experience) giving someone a loan to trade is just giving themselves more rope to hang themselves with.

g

[tulog]

I didn't advise him to trade. I advised him to invest. If he wanted to invest into an ETF, then instead of doing that he should invest into the same financial instruments that the ETF holds and avoid decay.

I also maintain only a cash, non-margin account. More cash is always the answer.
If you can get more cash for cheap, like 1%, which is below the rate of inflation, even better.

[gambler2075]

I didn't advise him to trade. You are not reading.

I am reading, you are using the word 'invest' but what does that mean? buy and hold for 5 years?

What time frame are you saying you should do this over?

Plus since (imo) the markets are very close to overbought, I think it is a terrible idea...when we go back to Dow 9.5K, then what?

g

[tulog]

I am reading, you are using the word 'invest' but what does that mean? buy and hold for 5 years?

What time frame are you saying you should do this over?

Plus since (imo) the markets are very close to overbought, I think it is a terrible idea...when we go back to Dow 9.5K, then what?

g

Good questions. Depends on when he needs liquid money. I don't see where he has specified that.

[gambler2075]

Good questions. Depends on when he needs liquid money. I don't see where he has specified that.

Of course this doesn't even begin to address the legality of taking out such a loan...

What Can I Use My Loan Money For - Is it Illegal to Invest My Student Loans - Can I Use Mortgage Dollars for Anything

I bet that the fact that 1% is the rate is because the lender takes into account the probability of default, and that anybody that used the loan for different purposes than what they stated probably is committing a crime.

g

[disneysteve]

ETFs are short term trading vehicles only.

Using an ETF for long term investing is bad because of ETF decay, and the greater market and non-market risks of ETFs.

Can you please explain what ETF decay means? I always see ETFs discussed as long-term investment vehicles both by companies selling them and in financial publications due to their diversification and low expenses. I have never heard anyone say they are trading vehicles only and have never heard the term "decay" applied to them so I'm not familiar with it.