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For investors who have opted to invest in exchange-traded funds, or ETFs, deciding how much to invest in ETFs each month depends on a few factors.
Many people invest a fixed amount every month based on their income (for example, 10% or 15% of their paycheck). But ultimately, choosing the right amount for you will depend on your financial situation, goals, time horizon, and risk tolerance.
Having a monthly ETF investment strategy can be useful in building a diversified portfolio, with potentially lower investment costs. Asking yourself a few questions can help you make the decision about how much to invest in ETFs every month to align with your goals.
Key Points
• Many investors choose a set amount to invest each month, and some or all of that can be invested in ETFs.
• Investing in ETFs every month can offer investors a low-cost way to have more diversification in their portfolios.
• Deciding how much to invest in ETFs every month depends on your financial situation, investing goals, time frame, and risk tolerance.
• ETFs may offer some advantages over mutual funds in that they may have lower fees and it’s possible to trade ETF shares throughout the day.
• Investing monthly in ETFs can help investors take advantage of dollar-cost averaging, which may offer some protection against risk.
Understanding ETF Investment Basics
ETFs, or exchange-traded funds, bundle different investments together. They’re similar to mutual funds, which are also a type of pooled investment, but ETFs are traded on stock exchanges throughout the day, in the same way that stocks are.
In that sense, ETFs can be more liquid than mutual fund shares, which only trade once a day. Investors can buy and sell ETFs, whether investing online or through a traditional brokerage, making them a flexible investment choice.
Advantages of ETFs
In addition, most (but not all) ETFs are passively managed, similar to index mutual funds, which track a market index like the S&P 500. Understanding the difference between ETFs and index funds is important, because although both types of funds may track an index, ETF shares can be more liquid, transparent, and tax efficient than index mutual funds.
There are also various types of ETFs that investors can choose from. For instance, there are ETFs that bundle different stocks and bonds together, others that are concentrated on energy stocks or tech stocks or green bonds. Again, this is similar to how mutual funds work — many mutual funds focus on a specific sector or investment style (e.g., stocks with a certain market capitalization).
Risks of Investing in ETFs
That said, ETFs have risks, like all other investments. Their values fluctuate with the market, for one, and there are risks that involve all of the underlying investments in each ETF — which could include credit risks, interest rate risks, industry- or sector-specific risks, and more.
As with any type of investment, it’s probably best to do your research on ETFs and the underlying investments, and any cost implications, before deciding to invest in ETFs.
Determining Your Monthly ETF Investment Strategy
Once you understand the benefits of ETFs, as well as the risks, you can decide what your monthly ETF investment strategy will be to support your financial goals.
The Power of Dollar-Cost Averaging
Investing on a regular basis, a method also known as dollar-cost averaging, can potentially help manage volatility and potential risks, especially when you’re just learning about how to start investing.
When you invest a fixed dollar amount on a steady basis (e.g. weekly or monthly), over time you end up buying more shares when prices are lower and fewer when prices are higher. This can lower the average cost per share, and (more important) help you avoid the temptation to time the market — e.g., selling when prices drop, or buying when they rise, which can increase the risk of losses.
Deciding on a Monthly Amount
Before learning how to trade ETFs, however, you have to decide how much you want to invest in exchange-traded funds, or other investments, each month.
Many investors choose a percentage of their income as a place to start. For example, a general consideration when deciding how much to save for retirement is to set aside at least 15% of your income. Other people prefer to go with a fixed dollar amount, like $200 or $500 per month. It depends on your goals and financial situation.
When investing for retirement, that could be a long-term ETF investment strategy — which is a different approach from active investing. But saving for a down payment could require a shorter-term strategy.
There’s no rule that says you have to stick with a portfolio of ETFs only, but it’s good to know that these funds are flexible enough to be used for longer- or shorter-term goals.
Factors That Influence Your Monthly ETF Contribution
Now it’s time to examine your financial goals and time horizon, your current financial situation, and your risk tolerance — as all of these will help you decide on a potential monthly ETF investment strategy.
Financial Goals and Time Horizon
Knowing your financial goals — whether that’s saving up for a big purchase, creating a long-term plan, going back to school — will help you determine a timeline that makes sense for you. Obviously, a goal like retirement could be 20 years, 30 years, or more. Knowing the time horizon for a near-term goal with a specific amount may require doing some due diligence.
For example, saving for house means researching the price for a home you can afford, knowing the down payment amount, and deciding how much you can save each month to reach that goal.
Current Financial Situation
You may want to give some serious thought to your current financial situation, which may, perhaps more than anything, dictate how much you can afford to invest on a monthly basis. Or, put another way: How much money will you be budgeting for savings, and potentially ETF investments, every month?
If you find yourself with a surplus of cash every month, because your income exceeds your expenses, then you may be able to save more consistently a monthly basis.
But even if the amount you have to invest each month is smaller than anticipated, it’s still a good idea to get started, so your money potentially has time to grow.
Risk Tolerance and Market Conditions
Finally, you may want to think about how much risk you’re able to stomach, and how the current market conditions are informing your risk appetite. This is generally referred to as risk tolerance — how much risk an investor is willing or able to assume in their portfolio.
As the saying goes, more risk, more reward — though typically, that can mean that riskier investments might generate higher returns, but with a much higher risk of loss.
When you’re thinking in terms of how much you’re able or willing to invest in ETFs every month, risk tolerance should be a big part of that calculation. It’s also an important part of selecting specific ETF investments, because some ETFs may have underlying investments that are higher risk, e.g., high volatility stocks.
Popular ETF Investment Strategies
There are a range of investing strategies ETF investors can consider:
• Buy-and-hold: Purchasing ETFs and holding on to them for many years is a classic buy-and-hold strategy that may generate returns over the long term. Although some people consider this a conservative approach, because it helps investors ride out periods of volatility, there is still the risk of loss, or holding onto an underperforming asset for too long, and missing other market opportunities.
• Thematic investing: There are thematic ETFs on the market, allowing investors to invest in specific interests (like green investing or biotechnology), or to capitalize on certain industries. This has its own risks, but it’s a strategy that could prove interesting and maybe even fun for some investors, depending on their goals.
There can be more options, such as investing in leveraged ETFs. Again, a little research is likely to shed some light on additional trading strategies that can be utilized for ETF investors.
Benefits of Consistent Monthly ETF Investing
Some potential benefits of consistent monthly investing, in ETFs or other securities, include the aforementioned advantages of dollar-cost averaging, the potential for long-term returns, and the ability to avoid emotional or knee-jerk reactions to swings in the market.
A consistent strategy can help investors stick to their plan and keep their larger goals in mind.
The Takeaway
Investing monthly in ETFs is one way to develop an investment strategy that includes principles of diversification, dollar-cost averaging, and more. There are many things that each individual investor should consider, of course, such as whether ETFs are the right investment for them, and their long-term goals and time horizon.
As far as how much an investor should try to invest in ETFs each month, that will depend on the individual investor’s specific situation, goals, and risk profile.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
What is the minimum amount I should invest in ETFs each month?
There is no minimum amount an investor should invest in ETFs each month. Should an investor choose to make monthly investments in ETFs, the amount should be determined by their financial situation, goals, time horizon, and risk tolerance.
How do I choose which ETFs to invest in?
The specific ETFs investors choose to invest in are likely going to be determined by the investor’s risk tolerance and goals. ETFs differ greatly from fund to fund, and some are riskier than others — accordingly, it may be a good idea to talk things through with a financial professional.
Should I invest a lump sum or spread my ETF investments monthly?
It can be a good idea to spread your investments out over a period of time to take advantage of dollar-cost averaging. That may help smooth out the risk profile of a portfolio.
Can I automatically set up recurring monthly ETF investments?
Depending on the brokerage or platform you use to invest, it’s possible to set up automatic, recurring investments in ETFs or other securities.
How often should I rebalance my ETF portfolio?
How often you rebalance your portfolio is up to you, but generally, professionals recommend that investors consider rebalancing once or twice per year. You may want to consider rebalancing, too, if your living circumstances change.
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Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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