I’m in my early investing years. Are ETFs a good choice for me?
If you have a longer time horizon, ETFs could be a good way to get more exposure to the stock market while you diversify to lower your investment risk. You can choose the type of investment you want to track with an ETF, and the level of risk.
Example: Equity-based ETFs would offer higher risk with a higher potential return than fixed income ETFs. Fixed income ETFs would offer slower, more stable growth.
If you know you’ll need your money soon, the risk of some ETFs may be too high.
Example: Let’s say you are saving to buy a house. You will need your down payment in the next year or two. If this is you, an equity-based ETF may not be the best choice. If the stock market is down when you need to sell, you may lose money. That’s why for some short-term investors, fixed income ETFs may be a better choice.
I’m in my peak earning years. Are ETFs a good choice for me?
If you are saving for a long-term goal such as retirement, ETFs could make a lot of sense for you. Some people buy a mix of different equity ETFs, with the expectation that they will see long-term growth. They know that in the past, the market has performed well over the long term. Of course, there’s no guarantee you will see the same results in the future.
I’m retiring. Are ETFs a good choice for me?
As you head into retirement, you may be less comfortable with risk. If so, you can start to move your equity ETFs to fixed income choices. This will offer slower, more stable growth as well as regular income.
Once you retire, you will likely need to sell some of your investments regularly for income. In this case, you may not want to buy any more ETFs and just sell what you have. Why? If you keep buying and then selling, the higher fees you pay will reduce your return. So, you could make less with ETFs than some other investments such as blue chip stocks.
Remember: ETFs are not for everyone
The main decisions when investing in an ETF are how much risk you can take and therefore the type of ETF you should buy. Before you decide, ask your stockbroker for a copy of the prospectus or look for it on the website of the company that sells the ETF. It will help you understand the fund’s investment strategy and direction. Then you can decide if it’s a good fit for you as an investor.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.