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Would you like to have a monthly income from your investments?
It is possible for everyone with a simple selection of ETF listed in the Italian market.
Choosing ETF’ as an investment tool provides many advantages that single titles do not give.
1. a diversification of the titles that reduces the risk of losing all the capital caused by the failure of one or more companies.
2. a currency diversification, because in an ETF there are often companies from different countries with different values and in any case you can also diversify by purchasing many kind of ETF.
3. no more company or bank bankruptcy risk because the capital invested in these instruments does not belong to the bank.
Let’s analyze the 3 points in detail:
1. A simple example. You have a candies store and your customers are only two, when one of them decides to change the shop you loose at once 50% of earnings and if you have just one custumer you would lose 100%.
If your customers are many dozens, one or two defections would not damage your profit.
You should have the same care with the investments. Many times you have a significant investment in a single title that could reset your profit.
2. Currency diversification is essential because no one exactly knows what will happen to Euro. If you have got an investment focused only on one nation’s bonds and this nation gets out of Europe you would have the same investment with a weaker currency then a loss of profit.
You have the same damage if the currency of one country depreciates because of the market, this happened in 2000 and in 2002 to the ones that bought bonds in US dollars with 0.9 €/$ exchange, that reached 1.50 €/$ exchange in 2008. If the bond expired in 2008/2009 you would have a 50% capital loss. It was due to the weakening of the dollar against the euro as indicated in the following image.

cambio-euro-dollaro-modificato

3. For ETFs, as for any investment fund, the asset is detached from the assets of the bank or from the issuing company. In 2008 when Lehman Brothers bank failed, stocks and bonds zeroed their value. Shareholders and bondholders lost all, but the mutual funds managed by the bank continued to live by themselves.
Similarly if an European bank fails, such as ETFs, its funds do not reset but the shares and the bonds of the bank do.
Finally, a big benefit of an ETFs is that you have very low purchase and management costs.

 

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