So, if these ETFs are so great, why hasn’t your broker or financial planner recommended them to you? Simple! Brokers, and those advisors working on commissions, don’t make money on ETFs; no commissions up front or hidden on back end. It's simply not in their interest to promote them.

With all positives for investor, there is one disadvantage, which may not be applicable to you unless you are a hot shot no load mutual fund picker. It is that in any given economic environment really super performing mutual funds can outperform indexes, but an ETF can never outperform index it’s tied to. You would need to look at your own investment record to know whether this is a downside for you.

Here’s a real life example from my advisory practice. My trend tracking indicator signaled a Buy on 4/29/03. Based on my momentum indicators I chose 5 no load mutual funds and 4 ETFs. Over following 3 months my ETFs gained anywhere from +10.02% to +22.36%, while my no load mutual funds gained from +9.15% to +36.35%. If you’re fortunate enough to make a superior selection you will outperform an ETF. Of course, that presumes you picked a very successful fund as compared to only a moderately successful ETF.

A word of caution! Just because ETFs are cheap and easy to buy doesn’t mean they will guarantee you a profit. You can lose money with them just as easily as you do with no-load mutual funds. You still need to make sure you have a disciplined methodology in place to help you get into and out of market. If you don’t, you’re gambling no matter what you invest in.

Having gotten disclaimer out of way, hopefully these insights into ETFs will broaden your perspective on ways you can prosper in your investments.

© Ulli G. Niemann

What can average talented investors learn from above and how can mistakes listed above be avoided? The following key points can be learned from some of most successful Trader Legends:

ØEach investor has its own personality. Some of investor have a very aggressive trading style and are trading very frequently. Some prefer stocks as other are more risk oriented and invest in options. Others want only spend a minimum of effort. An investor need to reflect on his profile and choose a trading approach which fits his personality.

ØA trade needs to be completely planned in advance. People plan a lot of their activities, e.g. when they go on holiday, when they move house etc. But do they have a plan when they invest? An investor needs to have a system that helps him to be prepared for all scenarios of a trade. One needs to know in advance when to buy, how much to buy, when to exit. Once a trade is executed price of instrument (stock, option, bond etc.) cannot be influenced by normal private investor anymore.

ØThe most important component of a trading system is Money Management? Surprised? Lots of investors and traders spend most of their time developing a very sophisticated trade entry system. But entry strategy contributes only approximately 15% to success of a Trading System based on academic studies. The most important question of a Trading System is how much to invest and how many positions to trade at same time.

ØA ‘can do’ attitude is required to trade successfully. 99% of world’s population probably has this dream of being financially free, but only 5% have reached it. Why? Because with phrases like “…it would be great, but I can’t…” or “…one day perhaps I will win in lottery, but until then I must work hard…” they have already lost.

For more information and a complete Stock Trading System based on a modified Nicolas Darvas approach, see my web site shown above.

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