Can you lose money investing in ETFs? 3 things to know.

Investing in the stock market is one of the most effective ways to build wealth over time, but buying individual stocks can be risky and time-consuming.

This strategy often requires a lot of research, as you’ll need to study the fundamentals of each company you’re interested in buying — from the business’s financials to its management team to how it compares to industry competitors saddle. Then you’ll need to do this a few dozen times, because a well-diversified portfolio should ideally contain at least 25 to 30 stocks.

Investing in an exchange-traded fund (ETF) can be a much simpler way to buy. Each ETF contains a variety of stocks, and by owning a single share of an ETF, you’ll instantly own a stake in every company in the fund. This can make it almost effortless to build a diversified portfolio with much less research.

While ETFs can sometimes be safer than individual stocks, there are still risks involved — and it’s possible to lose money with even the safest investment if you don’t have the right strategy. Here are three things to know.

1. All ETFs are different — and that will affect your risk potential

Not all ETFs are created equal, and some are riskier than others. Some ETFs may contain hundreds of large stocks from a wide variety of industries, while others may only include a few dozen small stocks in a very niche sector of the market.

For example, at the broadest level, you might have a fund like Vanguard Total Stock Market ETF — containing 3,656 stocks from all sectors of the stock market. Or you could opt for a more targeted fund such as Vanguard Health Care ETFcontaining 419 stocks from the healthcare industry alone. For an extremely niche option, you could also invest in a fund like iShares US Medical Devices ETF — which contains just 48 stocks from US companies that create and distribute medical devices.

All of these types of ETFs can be smart investments, but smaller, more niche funds carry more risk than broad-market funds. If you plan to invest in a more specific type of ETF, it’s wise to make sure the rest of your portfolio is well-diversified to protect your money as much as possible.

2. You could always experience short-term value losses

When investing in the stock market, it is important to distinguish between losing money and losing value. Your investment may lose value if its share price falls below your purchase price, but that doesn’t necessarily mean you’ll lose money.

For example, suppose you buy a share of Vanguard S&P 500 ETF (VOO -0.20%)which is currently priced at around $525 per share. Let’s also say that the market theoretically turns worse later this year and this ETF drops to $475 per share.

In this scenario, your investment would have lost $50 in value. But as long as you don’t sell your share, you won’t technically lose any money.

Then let’s say, for example, that the market goes up again and this ETF goes to $550 per share. If you sell at that point, you’ll have a $25 profit — even though your investment has temporarily lost value in the meantime.

In this respect, investing in ETFs is no different from investing in stocks. The market will always be shaky over weeks and months and can sometimes experience prolonged bear markets that last for years. However, while your investment may lose value in the short term, you won’t actually lose money unless you sell during those dips.

3. A long-term perspective is essential for any investment

In general, the longer you hold onto your investment, the more likely you are to achieve positive total returns.

When investing in an S&P 500 fund, holding the investment for one year has a 27 percent chance of negative returns, according to a study by investment firm Capital Group. However, after five years, that chance drops to 12%. Hold your fund for 10 years and there is only a 6% chance of negative returns.

Ideally, it’s best to hold your ETF for at least a few years or even decades to minimize potential losses. Again, the market will always experience ups and downs in the short term. In general, however, the longer you hold investments, the less likely you are to lose money.

Investing in ETFs can be a smart way to build wealth with less effort than buying individual stocks. While no investment is without risk, and it’s still possible to lose money with an ETF, the right strategy can better protect your savings.