You work hard for your money and work even harder to save it. We believe that a tweet by a CEO or an article on Reddit should not wholly alter your investment account’s direction. But that is the risk you run when you have individual company stocks in your portfolio. The value of GameStop and AMC stock has fluctuated in value over the past couple of weeks. If you owned GameStop or AMC stock before the rise in price dominated headlines across the nation, you are probably feeling pretty lucky. If you invested because you heard about the GameStop and AMC trading frenzy, there is a chance you have taken some significant losses.
To think that Reddit articles and tweets were highly responsible for the change in the value of these underlying stocks is unprecedented. It also presents an opportunity to witness how quickly an individual company’s stock price can change without any underlying change in value to the company.
At Twin Rivers, we believe that you do not need to own individual stocks to create your ideal future. There are investment vehicles available to provide you exposure to respective companies for a fee while limiting any particular company’s effect on your portfolio’s performance.
One example of this kind of investment vehicle is what’s known as Exchange-Traded Funds (ETF). ETFs are available for purchase daily on stock exchanges and are owned by the world’s largest asset managers. These asset managers invest in a bundle of stocks and sell shares of their investment vehicle, the ETF, to the public. One benefit of owning an ETF is an investor’s ability to gain exposure to a company that might be too expensive for their portfolio if they were to purchase the stock individually.
For example, if you were looking to invest in Amazon and cannot afford $3000 for a share, you may instead buy Fidelity’s MSCI Consumer Discretionary Index ETF. At the time this article was written, this ETF sat at $75.93 per share. Shares of Amazon make up 21.84% of the bundle of stocks represented by that particular ETF, meaning that ETF could go up in value if Amazon has a great day.
But what if Amazon has a terrible day? Another benefit to owning an ETF is the built-in diversification. In this same example, if Amazon plummeted in value, only 21.84% of that investment would be directly affected. And, if the companies that make up the remaining 78.16% of that ETF hold or go up in value on that same day, the drop in Amazon’s value would affect your investment even less.
There are, of course, risks to owning ETFs; similar to stocks, ETFs are only liquid if there are both sellers and buyers in the market. For many ETFs, the number of buyers and sellers can be much less than those trading individual company stock at any given time. So if you own an ETF that is thinly traded, and its value is dropping, it may be hard to find someone to buy it quickly.
There are also fees involved with these investments, but they are typically much less than their Mutual Fund counterparts. Although liquidity and fees are concepts that apply to all investments available on exchanges, you should be aware of them when deciding which ETFs are right for your portfolio.
At Twin Rivers, our job is to smooth out the ride for your investment accounts, so you can focus on living your life while reaching the milestones that are most important to you. We want you to invest your money with intention, which means developing an investment strategy that limits the risk in your portfolio. If you would like to learn more about ETFs and how they could be utilized in your portfolio, please do not hesitate to contact one of our advisors.
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The Twin Rivers team wants to guide you on your journey to financial success. If you have any questions about the topics above or would like to discuss any financial decision you are facing, please do not hesitate to contact our team.