ETF Investing Mistakes - Avoid These 10 When Buying ETFs

Key Takeaways

Don’t just decide in favor of one ETF or against another just because it has performed particularly well or badly this year.
Understand exactly what is in an ETF, such as what you are investing in, whether you are betting on falling or rising prices, etc.
Just because you are invested in several ETFs does not mean that you also invest in different sectors/companies.
Even though everyone would like it, there is still no “perfect” entry point into the market.
Avoid the classic herd behavior of not chasing every latest, hottest trend.
It is important that you understand the risks of the market and do not invest too riskily.
Emotions have no place in investing, neither greed nor fear is useful here.
Mistakes can also be made when buying and selling. Therefore, look at when and how you act correctly.
The expense ratio has become one of the most important indicators for investors, but it can also be misinterpreted.
Last but not least, it is about the different currencies. This is already calculated into the ETF, but goods and services can fluctuate.

Introduction: Avoid these 10 mistakes

Investing can be a difficult game and even the most experienced investors make mistakes from time to time. However, the key to success is to learn from these mistakes and take steps to avoid them in the future. To help you do that, we decided to ask our community on Instagram for their biggest ETF investing mistakes. By sharing their answers with you, we aim to provide valuable insights that can help you avoid these common ETF investing mistakes and achieve greater success on your own investing journey.

Whether you’re a seasoned pro or just starting out, it’s always a good idea to educate yourself and learn from the experiences of others. With this in mind, we’ve compiled a list of the most common ETF investing mistakes shared by our Instagram community. So if you want to avoid making the same mistakes and improve your investment results, read on and consider the following tips and strategies tried and tested by other investors like you!

ETF Investing Mistake #1: Choosing The 'Wrong' ETFs

One of the most common mistakes new investors make is searching for the “best” ETFs without being clear about their investment goals and strategies. While it may seem obvious that choosing the right ETF is critical to achieving your investment goals, many investors fall into the trap of simply Googling “best ETFs in 2023” without taking the time to identify their individual needs and preferences.

To avoid this mistake, it is important to first define your investment strategy. Ask yourself why you are investing in the first place. What are your financial goals, both short-term and long-term? Do you want to build wealth over time or earn an income in retirement? The answers to these questions will help you find the right approach to achieving your investment goals.

Once you have determined your investment strategy, the next step is to choose the right tactics. This involves deciding how to invest your money to achieve the results you want. Some investors prefer a passive approach, using index-based ETFs that track a particular market or sector. Others prefer a more active approach, choosing ETFs managed by a professional fund manager or selecting individual stocks to invest in.

Only once you have answered these two crucial questions you can start to choose the right ETF for your goals. Rather than simply chasing the ETF that is currently performing well or avoiding the one that is struggling, you will be able to make a more informed decision based on your own individual investment needs and goals.

ETF Investing Mistake #2: Not Understanding What's Inside Your ETF

Investing in an exchange-traded fund can be a great way to gain exposure to a particular market or sector, but before you invest, know exactly what you’re getting into. With so many ETFs available on the market, it can be difficult to differentiate between them and figure out which one is best for your investment strategy. To help you with this process, we’ve put together some important distinctions to keep in mind when evaluating ETFs.

Is it an index fund? First and foremost, it is important to determine whether or not your ETF is an index fund. Index ETFs are designed to track a specific market index, such as the S&P 500 or the NASDAQ. So when the index goes up, so does your ETF. Vice versa, if the index goes down, your ETF will go down in value. Understanding this correlation between the ETF and the underlying index is essential to making informed investment decisions.
Is it a long ETF or a short ETF? Another important distinction is whether your ETF is a long or short ETF. If it is a short ETF, the inverse relationship between the ETF and the underlying index is reversed. In other words: When the market goes down, your ETF goes up. This can be a useful tool for investors who want to hedge against market downturns or take advantage of short-term trading opportunities.
What is your ETF investing in? In addition to understanding the basic mechanics of your ETF, it is also important to know what it actually invests in. This information can usually be found on your ETF provider’s website and will give you a better idea of the specific assets and securities your investment is invested in.
Understand the weighting method. Finally, it is important to understand the weighting method used by your ETF. This can have a significant impact on your investment results, as different weighting methods can result in different levels of diversification and risk exposure. For example, an equally weighted ETF allocates an equal share of capital to each security in its portfolio, while a market cap-weighted ETF invests more heavily in larger companies with higher market caps.

If you take the time to research these important distinctions and understand precisely what you are investing in, you will be better able to make informed decisions and achieve your investment goals. Remember: a little research can go a long way when it comes to ETF investing!

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ETF Investing Mistake #3: Illusion of Diversification

It is also very important to know that not all funds are the same. In fact, it’s common for ETFs with different names to hold the same underlying assets, which can lead to unintended consequences for your portfolio if you’re not careful.

Take the example of buying three of the most popular ETFs on the market: NASDAQ 100, S&P 500, and MSCI World. On the surface, these three funds appear to be different investments, each with its own exposure to different markets and sectors. However, upon closer inspection, you will be surprised to find that the underlying holdings of these three ETFs overlap significantly.

In this example. be up to 90% of your portfolio invested in the US market alone, even though you thought you were diversifying across different regions and asset classes. This can be particularly problematic if you are looking to diversify broadly and minimize your exposure to any one market or sector.

To avoid this type of situation, it is important that you do your due diligence and carefully review the underlying holdings of any ETFs you are considering. This may include reviewing the key holdings of each fund to see if there is significant overlap, as well as examining the overall geographic and sector diversification of the portfolio.

ETF Investing Mistake #4: Trading ETFs & Timing The Market

Investing is a long-term game and it is important to remember that there is no “perfect” time to enter. Many investors make the ETF investing mistake of trying to time the market, thinking they can predict when prices will rise or fall and make a quick profit. In reality, however, the odds are against them, and they are more likely to be wrong than right.

A study conducted by J.P. Morgan has shown how detrimental trying to time the market can be to your portfolio. The study looked at the returns of the S&P 500 over a 20-year period, from 2002 to 2021. If you had invested 10.000$ at the beginning of the period and kept it that way for the entire 20 years, you would have had about 60.000$ at the end of 2021.

However, if you had tried to time the market and missed the ten best days in that 20-year period, your returns would have been halved. That’s a significant difference and underscores the importance of staying invested for the long term, even when market volatility tempts you to time your trades.

According to the study, if you had missed the best 30 days in the same 20-year period, you would have had virtually no return over 20 years! This shows how difficult it is to time the market successfully and how costly it can be to try and fail.

ETF Investing Mistake #5: Investing In The Hottest New Trends

We, humans, tend to have a herd instinct when it comes to investing. We see a trend or hear about the next “big thing” and jump on the bandwagon, hoping to make a quick profit. Unfortunately, this behavior can lead to some serious pitfalls and missed opportunities.

One of the main problems with investing in popular trends is that it often leads to buying high and selling low – exactly the opposite of what successful investors do. When a new exchange-traded fund or investment opportunity gains popularity and attracts a lot of money, the price is often raised to unsustainable levels. Investors who get in at this point are essentially buying at the peak of the market and may be left holding the bag when the trend eventually subsides.

ETF Investing Mistake #6: Not Understanding Investment Risk

Understanding risk is an essential part of successful investing. However, many investors find it difficult to strike the right balance when it comes to assessing risk. On the one hand, some investors underestimate risk based on the past success of the stock market. They assume that the market will continue to perform well and disregard possible downside risks. This can lead to overconfidence and risky investment decisions that can ultimately result in significant losses.

On the other hand, some investors may overestimate risk by reviewing their ETF portfolio on a daily basis. While it is important to stay informed about your investments, obsessively monitoring your portfolio can lead to unnecessary anxiety and decision paralysis. It’s important to remember that short-term market fluctuations are a normal part of investing, and overreacting to any bump in the road can lead to costly mistakes.

ETF Investing Mistake #7: Making Emotional Investment Decisions

When it comes to investing, emotions can often cloud our judgment and lead us to make decisions that may not be in our best interest. It is important to remember that investing should be a rational decision based on careful consideration of our financial goals, risk tolerance, and other factors.

Despite the ease and convenience of buying and selling ETFs, it is important to resist the urge to act on our feelings. If you are feeling anxious, fearful, or overly optimistic about the market, it is usually best to take a step back and wait until you have a clear head again.

This does not mean that you should never be proactive about your investments. However, it is important that your decisions are based on a sound investment strategy and a clear idea of your goals and risk tolerance. By staying calm and avoiding impulsive decisions, you will be in a better position to make wise investment decisions that can help you achieve long-term financial success.

ETF Investing Mistake #8: Not Knowing How & When To Trade

When trading exchange-traded funds, it is crucial to use the right type of order to ensure you get the best possible price for your investment. Market orders, while convenient, can also be risky as they can result in you buying or selling at a price significantly higher or lower than you intended.

To have better control over your trades, it is usually better to use limit orders instead. With a limit order, you set the price at which you are willing to buy or sell your exchange-traded fund, ensuring that you get the price you want or better. This way you can avoid costly mistakes and make more informed investment decisions.

It is also important to consider the timing of your trade. If you want to buy or sell exchange-traded funds, it is usually best to do so during the day when the market is more active and prices are usually more stable. Avoid trading around opening or closing time as this can lead to higher prices due to increased demand.

ETF Investing Mistake #9: Comparing Fees Of ETFs

Many investors tend to focus on the total expense ratio (TER) when it comes to evaluating the cost of investing in exchange-traded funds. However, this ratio can be misleading and is not always the most accurate indicator of the true costs associated with an ETF. For example, let’s say your chosen index returned 10% over a given period, but your ETF only returned 9.5%, due to the 0.5% variance. In this case, it might look like you are paying a 0.5% fee in terms of TER.

However, it is important to understand that the TER is only one of the many costs associated with ETF investing. Other costs can include bid-ask spreads, trading commissions, and taxes. Therefore, it is important to consider all of these costs when evaluating the true cost of investing in an ETF.

In addition, as mentioned earlier, a more expensive ETF may outperform a cheaper ETF with a better tracking difference. This is because the investment strategy and the index that an ETF tracks play a crucial role in determining its performance. Therefore, it is crucial to evaluate an ETF’s investment strategy and index before relying solely on its TER to make an investment decision.

ETF Investing Mistake #10: Factoring in ETF Currency

If you are an investor in Germany with a euro-based investment account, it is important to understand how exchange rates can affect your investments. One important point is that the currency of the ETF you buy does not matter, as your broker or ETF provider will handle the exchange rate for you. This means that whatever currency your ETF is denominated in, you will get the same price and the same return.

However, it is important to carefully consider which ETFs are suitable for your investment objectives. Even if exchange rates do not directly affect the return on your investment, they can still have an indirect impact on the overall performance of your portfolio. For example, changes in exchange rates can affect the prices of goods and services, which in turn can affect the companies and markets in which your ETF is invested.

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Conclusion: Focus on your investing strategy

In summary, investing in exchange-traded funds is a good way to diversify your portfolio and achieve your investment goals. However, there are some common ETF investing mistakes that investors make that can have a negative impact on their returns. It is important to do your research and understand what you are investing in before making a decision. Professional advice from a financial advisor or investment specialist can also be helpful in finding the right investment strategy.

So if you’re not sure which ETFs are right for your investment strategy, or if you want to make sure you’re making the right investment decisions, don’t hesitate to contact us today. We can help you assess your goals and risk tolerance, and recommend the best investment strategy for your needs so you can make informed investment decisions that will help you achieve your financial goals.

ETF Investing Mistakes - Avoid These 10