There are obviously a great number of investments to choose from these days, and an investor quite often needs a substantial amount of money to build a solid, diversified portfolio. This capital requirement can be particularly challenging for young investors who are just starting out, as they may have minimal savings to invest.
However, exchange-traded funds can make it possible for younger investors to have a diversified portfolio with a relatively low investment threshold, according to "Shark Tank" panelist Kevin O'Leary (also known as Mr. Wonderful). ETFs have a number of features that make them ideal investment vehicles for the younger investor, said O'Leary, who is chairman of O'Shares Investments.
There are more than 1,900 ETFs and they include practically every asset class — stocks, bonds, real estate, commodities, currencies and international investments.
For young investors, O'Leary pointed out, this range of available ETFs offers a wide variety of investment choices that are not available, for instance, with index mutual funds. That wide range of ETFs means that a young investor can build a diversified portfolio at a lower cost than what would have been required in the past.
ETFs also offer the investor transparency in their holdings and have a tax efficiency, O'Leary said. To that point, most ETFs disclose their full portfolios on public, free websites every single day of the year.
Since no investment is guaranteed, young investors should also be aware of the negative features of ETFs, O'Leary advised.
"One of the problems that young investors should consider and be mindful of is that an ETF is only as good as what's inside the basket," he said.
That's why right up there with the benefit of low costs and tax efficiency, young people need to look at diversification when investing in ETFs. It is very important for young investors to do their homework and to know exactly what's in their portfolio, O'Leary explained.
(O'Shares Investments, a division of O'Leary Funds Management LP, invests in ETFs.)