September 25

Coffee With Mike- Why Do We Use ETFs?

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Someone asked me recently about mutual funds and ETFs, and why we use those instead of using individual stocks and bonds in our investment strategies. I really began to think about that, and I actually don't remember how I came up with it, but I compared it to a flock of geese. I found out, by the way, it's called a team of geese if they're flying in formation, so this is how I think of a mutual fund. You think about all these geese that get together to fly across the country, and they're in this V formation, they're all honking to each other. 

When I got curious enough to look that up, I found out that the reason they're in the V formation is because they can fly a lot farther doing that, and the reason they're honking is to encourage each other to keep the same pace. When someone gets tired, they just go back further in the formation, and someone pulls up and they begin to take on more of the brunt of the air that they're coming up against. I think that's really a good story or a really good picture of what a mutual fund is. 

A mutual fund is a bunch of stocks and or a bunch of bonds that are put together in one thing so that a bunch of investors can come in and use them, use that to get from one place to another in their financial goals. 

I think that is a way for us to think about investing. Do we want to go out at this alone or do we want to go at it as a community? If you want to go at it alone, if you're flying across the country alone, you better be a pretty darn big bird, because you're either going to get picked on by other birds, or you're going to get really beat up by the elements. You think about a goose, you know they're huge, right? They're like 3 feet tall and 15 pounds, and so they can take a lot of beating in the air. But they take a lot less beating when they do it together. I think that's what a mutual fund offers.

There's nothing wrong with investing in individual stocks and bonds, I think there's just a lot of beating up that happens because it's so costly to do that at times, and also there is a little bit of wonder whether or not you got the right stock or not, and so you're tempted to trade out and get something else. Whereas in a mutual fund, you know you got what you need and you know you got other people along this journey with you, and so why not? Why not just continue on that path, because it's just a lot simpler, and it feels a lot easier, a lot smoother to get from one point to another.

"I think that is a way for us to think about investing. Do we want to go out at this alone or do we want to go at it as a community?"

So, that's what I think a mutual fund really does for you is, it gives you a community to go through this experience that gives you a little bit more confidence in what you're doing, and allows you to stay with it a little bit longer. As you stay with it, you're bound to have more success. Staying with something is what gives you success, and I think mutual funds help you do that best. 

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