RSS feedJust came across an article at Motley Fool talking about a mistake that many people make when deciding how best to allocate their assets. The basic principle is that most people who actively pick stocks in addition to using ETFs for quick portfolio diversification and to gain access to various asset classes may unwittingly be doubling down on their investments.
For example, if you own an S&P 500 index fund, buying additional US large caps will really only add to the exposure you already have. Furthermore, since the index is market value weighted, the largest companies (and usually most popularly held by at-home investors) in the US like Citigroup, ConocoPhillips, and Microsoft already make up 3.95% of a market weighted ETF’s assets. Apple, a Curious Investor favorite, also makes up an additional 1.09% of assets.
So, for those of you taking notes, don’t forget that owning an ETF is very much like gaining exposure to all the stocks represented by the ETF’s underlying index. If you do choose to use them, then think twice about redundantly buying individual shares of similar companies. Instead, use the time you’ve freed up by buying an ETF to research stocks in other sectors and really gain the benefits of diversification and ease of use that ETFs can offer.
