This is a pertinent question to all new investors/traders who are thinking about whether or not trading ETFs is the right investment vehicle for them. The key to answering this question is really to understand the fundamentals of trading ETFs and your own trading/investing philosophies, also making sure that they are aligned with each other. In other words, do not follow hype and hearsay and jump into trading ETFs just because you want to make a lot of money.

With that said, here is a simple breakdown of what ETFs are:

1. Low Trading Fees – Since they trade like stocks, you do not have to pay a management fee for trading ETFs as you would with mutual funds. Investors can buy and sell stocks of ETFs during market hours. Each purchase or sell will cost you a commission.

2. Moderate Volatility – The volatility of an ETF largely depends on the underlying asset index/class that it is trying mimic and the volume of shares being traded. Because of its stock-like nature, ETFs have moderate volatility.

You have to really consider your financial situation and degree of risk tolerance before deciding if trading ETFs are right for you. For example, if you are into long term investments of larger amounts of money, mutual funds might seem like a more sound investment because it is more hands-off and will not burn your money through commission charges.

In simple terms, trading ETFs might not be suitable for you if:

1. You want excellent returns but are not prepared for the potential risks involved.

2. You do not have a deep understanding of the macroeconomic condition as well as how it might affect the underlying asset class of your ETF.

3. You do not understand the concept of risk-management. The reason is because ETFs can be traded on margin and allows for short selling. This can turn ETFs into a derivative, which is higher in order of complexity. Risk management also involves knowing your own financial situation and assessing the amount of money that you can afford to lose.

4. Do not have an understanding of the ETF manager and his/her track record. You need to be comfortable that the fund manager of the ETF you are investing in has the resources, track record, experience and capabilities to handle your investment. Of course, you need to understand that past records does not necessarily guarantee future success.

The post Should I Trade ETFs? appeared first on The Budgeting Babe.

With so many investment instruments out there, why should you put your money into bonds? What makes buying bonds an attractive option to so many investors?

Well, the real answer really depends on your investing philosophies

Buying bonds is often seen as a relatively safe investment because you are almost guaranteed to get your money back, on top of the amount of interest you will receive year over year. This hands-off, no stress kind of investments is the ideal way to park your money if you belong to the group of investors who are very conservative in nature. Of course, as you would expect with an investment with little risk,buying bonds does not yield as high of a return when compared with stocks or funds.

Besides appealing to the conservative investors, here are just a couple more reasons why buying bonds is really more appealing than it seems.

1. Good Source of Passive Income – One of the most important reasons people start buying bonds is to make consistent passive income. Almost all bonds come with an interest rate, either variable or fixed, and this provides the investor with predictability in terms of cash flow and income. While other kinds of investments such as stocks also offer passive income in terms of dividends, most are not able to offer the same kind of predictability or security that comes with bonds. Stocks predictability depends on the financial status of the underlying company and the price might fluctuate greatly during times of volatility.

2. Hedging against Inflation – Buying and holding a bond over the long haul exposes you to the risk of inflation. Suppose the inflation rate is 2% every year, your 6% annual interest suddenly doesn’t seem so appealing anymore. Furthermore, the principal which you will be getting back at maturity date will be worth less than the initial value of principal you have invested in the first place. Because of this, certain government bonds, such as US Treasury bonds raise their interest every year so that your investment is actually protected against inflation. This means that at the end of the bond term, you will not lose any money due to inflation.

3. Portfolio Diversification – If you have an investment portfolio, bonds help to diversify your investment because it is considered as a different asset class from stocks and funds. In times of volatility, bond prices to not fluctuate as much as stocks and funds, and because of this, they help to smooth out the volatility curve and dampen the impact of negative swings.

Placing your money in a more conservative vehicle such as bonds will yield you less potential return over time, but allocating a certain amount of money to invest in it is a very prudent decision given the amount of benefits it brings to the table.

The post Should I Be Buying Bonds? appeared first on The Budgeting Babe.