Exchange Traded Funds Vs. The Stock-based Portfolio

The everyday idea of market trading is a flurry of excitement for one who imagines it, conjuring up movie images of the unknown genius who rides a fast wave of brilliant thinking to a fortune. "Playing the market," i.e. speculating and trading individual stocks on the exchange, captures the public's imagination. Understandable, for playing the stock market essentially carries the investor away through the thrill of gambling.

Building a portfolio of stock shares can indeed prove fruitful to the clever investor, particularly in boom periods. The gains achieved on the New York Stock Exchange made headline after headline after that market went through the roof with the dot-com explosion in the 1990s. With lots of foresight and a fair share of luck, investment in smaller lesser-known companies (e.g. tiny, embryonic firms like young Amazon.com) can bring stunning returns.

But in stock portfolios, it's all about the risk. Daily diligence on the investor's part is necessary. While stock market players live up to the verb "to play," mutual funds, index funds and ETFs demonstrate the principle of "slow and steady wins the race."

At the heart of success in ETF investment is the simplicity of what experts report to be the overwhelming factor in success: Asset allocation. Some sources call asset allocation of chief importance and absolutely crucial to success in investment.

The exchange traded fund turns traditional thinking about investment in exchange markets on its head. Those who pick and choose from among the thousands of individual stocks out there are judging based on data from or about individual firms; the consideration given the type of stock is minimal.

The reverse philosophy of ETF investment makes for the most marked difference between these funds and the most traditional of all market investment types: With ETFs, the investor is for all intents and purposes buying a proportion of an entire market and so the ETF investor is freed from the decision of divvying up the portfolio among varying asset classes, not to mention the subsequent innumerable day-to-day choices required of the stock investor.