Know why you're investing
Q: I am 32 years old and have been investing since I was 26. I have never invested in individual stock but have stuck to Mutual Funds.
I read an article a little while ago about exchange traded funds. They sound like another good option and a logical next step from owning mutual funds to individual securities.
What is your opinion of exchange traded funds and the risks?
A: Congratulations! You've started early and stuck with the investments over the last six years. Mutual funds can be very good investments depending on the type of funds you choose.
Investing in individual stocks requires some knowledge of the market, but the assistance of a good investment advisor is always advantageous.
Exchange Traded Funds is also another investment option. It is important however, to understand the difference between a mutual fund and an exchange traded fund.
A mutual fund is a professionally managed investment solution that comprises a pool of funds from many investors like you who invest in short term and long term instruments. These instruments can be cash, income, (such as bonds or GICs,) or equity that comprises shares in companies.
The exchange-traded funds on the other hand are traded like stocks, but on the secondary market. There are many types of exchange traded funds so it is important to speak to someone who understands them.
These funds are tracked on an index on the exchange. They are traded at a similar price of the assets to which they are linked, called the underlying asset. They have a very low cost but only large institutional investors purchase these assets from the fund manager.
These large institutional investors are known as authorized participants. Individual investors like you, usually use the services of a broker to act on their behalf.
My advice to you is to understand why you are investing. The purpose of your investment is very important.
Your choice of investments will depend to a great extent on the amount of funds available. Determine how long you are planning to invest in the funds and ensure the investments match your level of risk tolerance.
Visit your local branch and speak to a financial advisor who has the expert knowledge to assist you in making this crucial investment decision
- Chris Alexander, MBA, BBM, PFP, FICB