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Money Management: Exchange on Trade Fund (ETF), which is associated with the stock market - Assignment Example

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Money Management Name: Course: Professor: Institution: City and State: Date: Money Management Introduction For the realization of a better result in any venture, regardless of whether it is a business venture or any other venture, there is a need to have a good management to steer the investment to success…
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Money Management: Exchange on Trade Fund (ETF), which is associated with the stock market
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Money Management: Exchange on Trade Fund (ETF), which is associated with the stock market

Money management is the process of being a custodian of one’s finances by knowing where today’s finances are being spent, and drawing a well thought out plan showing where one wants this money to go. Therefore, it calls for one to be well organized; have set goals, which would gear this investment to success; have a track of one’s spending by putting in place a realistic budget, and above all have a well thought-out savings strategy. The paper takes cognizance of the Exchange on Trade Fund (ETF), which is associated with the stock market. Carrel (2008) explains that ETF is an investment fund or security that is entrusted with the stock exchange market. ETFs resemble a commodity, an index or a basket like an index fund; thus it is designed to trade like a stock on an exchange market. The paper would, therefore, discuss the aspects surrounding the financial market as far as ETF is concerned (Carrel 2008). My risk profile evaluation reflection As an investor, I would seek to establish a strategy that matches my risk profile so that I may not be caught off guard should such risks occur. I would, therefore, work towards ensuring that I cushion myself against any short- term loss. This becomes possible if I ensure long-term growth in the value of my investment and by being cautious on inflation. My investment objectives would only be pegged on the long-term investment; therefore, I will have to take risks in order to get higher returns (Scott 1975). To demonstrate my risk profile and asset allocation, I will use the model shown in the appendix III. Under this profile, my risk profile falls under 44-58 score, which means that my risk taking profile is moderate. This will inspire my selection for passive participant portfolio that will be explained later. In view of this, my portfolio selection will depend on my key objectives including time horizon, risk tolerance, and other assets held out of the plan. The original amount or the principal investment is not assured at any time, including the proposed year of allocation. I will seek to establish my risk tolerance, so I can know my level of investment risk, with which I am comfortable. I will do this through the investor profile quiz as shown in Appendix I (Milevsky 2001; Milevsky 1998). ETFs verses Mutual funds In this study, I will prefer ETF to mutual funds, because ETF has some potential advantages compared with mutual funds. Most importantly, my aim is to choose an investment that will improve my rate of return on investment, while minimizing the risk profile as much as possible. ETFs are operated at low expenses because they are passively invested unlike mutual funds, hence improving my rate of return. In addition, I will prefer ETFs to mutual funds because of their tax efficiency, due to their structure that makes them avoid capital gain tax. The following are some specific advantages of ETFs. Condensed Risk Hedging Vehicles Hedging is an effective risk diversification technique employed by buying an investment that is inversely associated with other assets in a group. An Inverse ETF is designed to shift in the reverse direction of a particular index. A portfolio manager, with the use of Inverse ETF, can reduce the market threat of an entire group or precise part of a group. Increased Diversification When circumstances are in need of a basket of stocks, ETFs helps in diversification. Diversification is the situation of being in possession of enough personal investments in an asset category or ... Read More
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