Getting started with exchange traded funds (ETFs) may appear intimidating, especially when you’re new to investing.
In this article we share six key things to know if you’re just getting started with ETFs.
Don’t expect immediate profits
The first step is to adjust your expectations. Although the prospect of investing can be exciting, it’s important to understand that immediate profits are not the norm.
Investing is more akin to a marathon than a sprint, and it requires patience and perseverance. It might take several months, or even years to begin seeing profits.
However, this doesn’t mean you’re on the wrong track. Keep your cool, and stick to your plan without making hasty changes.
Spread your risk and diversify your portfolio
As a beginner, one of the most appealing aspects of ETFs is their potential for diversification. This means you can spread your investment across a variety of assets rather than putting all your eggs in one basket. There can be a strong temptation to invest heavily in assets that are currently performing well.
However, it’s essential to remember that the market is fluid and ever-changing – what’s performing well today may not continue on the same trajectory tomorrow.
Conversely, those assets that aren’t doing so well today might prove to be the stars of tomorrow. By diversifying your investments, you can shield yourself from potential market volatility. And when you do make a profit, consider using a portion of it to strengthen your positions in assets that are currently underperforming, known as rebalancing.
Do ETFs pay dividends?
The short answer is yes.However, whether a specific ETF pays dividends or not depends largely on its underlying assets. ETFs that include dividend-paying stocks or coupon-paying bonds, for example, are more likely to pass on these earnings to investors in the form of dividends. If receiving regular income from your investments is a priority, you might want to focus on dividend-paying ETFs when building your portfolio.
It’s also handy to know that for most ETFs, the dividend is known as a distribution. A distribution from an ETF represents your share of the income earned by a fund and can include some capital gains from investments that have been sold within the fund.
What are the top 5 ETFs to buy?
While it would be easy to provide a list of the current top-performing ETFs, the truth is that what might be a top pick for one investor may not be the best choice for another. It’s critical to remember that the “best” ETF for you will depend on your specific financial goals, risk tolerance, and investment timeline. Rather than following someone else’s picks, take the time to conduct thorough research and choose the ETFs that best align with your personal investment strategy. Stockspot offers a range of resources and tools to assist you in this process.
“Investing is a long-term journey and patience is key
What about taxes on ETFs in Australia?
In Australia, just like in many other countries, you are required to pay tax on any profits you make from your ETF investments. These profits are known as capital gains. You also need to pay tax on any income earned from the ETFs such as distributions.
Understanding the tax implications of investing in ETFs is an important part of your investment journey. Make sure you take the time to understand the rules specific to your area to avoid any unpleasant surprises at tax time.
How should I manage my ETF portfolio?
Our final bit of advice may seem counterintuitive, but it’s an important one: Don’t obsess over your investment account. Constantly checking your portfolio can lead to impulsive decisions, which can end up being costly mistakes. Instead, try to check your portfolio only once a month or once every few months.
This approach can help you maintain perspective, stick to your investment strategy, and avoid unnecessary costs and stress.
Remember, investing is a long-term journey and patience is key.