In my last post I mentioned that I did not have any ETFs at the time.  Since then, I did make an ETF purchase for my portfolio.  If I could go back to when I started investing, I definitely would have set a solid ETF foundation in my portfolio before adding individual stocks. 

Maintaining a diversified portfolio that can withstand all market conditions is not an easy thing to do, and a total market ETF can help give you that solid base that you need.  I chose Vanguard Total Stock Market ETF (VTI), because it gave me instant access to large cap, small caps, value, growth; every single US stock.  This fund also has extremely low fees, so I was sold. 

ETFs definitely won’t make you rich quick, as will “this hot penny stock that is going to skyrocket 60,000%!”  I get junk emails like this all the time, and that’s just what they are; junk.  Never, though, do I get emails saying, “build a solid portfolio for the long haul!”, because it doesn’t sound as appealing to gullible people, but at least it’s feasible. 

Anyways, I think the main reason we should all own ETFs is because they give us some protection from ourselves when the markets go bad.  I’ll explain: back in the late 90’s, novice investors were jumping on board at a dizzying rate, throwing money at internet stocks whose shares were going to rise to infinity.  As we know now, internet stocks did just the opposite, crashing way harder than the broader markets with many companies disappearing completely, leaving investors with nothing.  The point here is that we might feel confident in something and put too much at stake,  but the market can turn violently against our predictions.  Hindsight is 20/20, and now we can see how crazy it was to bet so heavily on internet and technology stocks, but in 1999 you would have been laughed at if at least 80% of your stocks weren’t from this overblown sector. 

The bottom line:  There are tons of investors who lost nearly everything and who will never again dare invest a penny.  If your portfolio would have had a solid foundation in ETFs in 1999, it would have lost a good amount of value for sure, but if you would have loaded up some more as the markets were down and held it too this day, you’d be sitting pretty.  Sure you might have some duds from your individual picks, but your portfolio would have survived.  Can’t say that for those who bet the whole house on Pets.com.  Very few people have a long track record of consistently out-performing the markets with speculative picks, so unless you are one of these ungodly good stock pickers, better hedge your bets. 

Next time we’ll look into how dollar cost averaging with ETFs is a complete fool-proof way to make you wealthy over time.