This article will discuss 4 different ways that an investor can choose to invest in stocks. An investor should decide which of the following approaches are best for their individual needs and goals. Following are four different ways to invest in stocks.
Mutual Funds:
One way an investor can own stock is by investing in a mutual fund. A mutual fund is an investment that permits investors to pool their money together into one investment using an active portfolio manager. However, many actively managed mutual funds charge high fees which lower an investor’s returns!
It is important to pay attention to the fees the fund charges. One low-cost mutual fund is Vanguard. Vanguard mutual funds do not charge front-end, back-end load fees or sales commissions.
A mutual fund manager will attempt to outperform the market. Their aim is to beat the “Standard & Poor’s 500” Price Index. However, history has shown that the majority of mutual fund managers are unable to beat the market’s return! And, many of these funds show “poor “performance!
Many mutual fund managers feel that their stock-picking skills are “exceptional.” These managers will attempt to “predict” where the market will be in the future. However, no one can predict with perfect accuracy where the market will be at any point in time
An investor should keep in mind, too, that just because a mutual fund shows outstanding results in one year does not mean they will repeat this performance the following year. Past performance is no guarantee of future performance.
A mutual fund will hold hundreds of different securities and invest in many different types of stocks. They do this in an attempt, to keep portfolios “diversified.” Diversification will serve the investor by making sure they are invested in a variety of different company’s stocks. This can reduce an investor’s overall risk.
However, active mutual fund managers constantly buy and sell. This results in large turnover percentages! This constant turnover often results, for the investor, in “lower” returns and “larger” tax implications.
Index Funds:
The secondway to invest is by investing in an Index Fund. The aim of an index fund is to simply follow and match the market like the S&P 500. Standard & Poor’s 500 Price Index (S&P 500) represents 500 of the largest U.S. companies on the NYSE and NASDAQ exchange. One low-cost index fund to invest in is the Vanguard 500 Index Fund (VFINX). As of this writing, it has an expense ratio of 0.14%. There are also other good index funds to invest in and an investor should check them all out.
Index funds, unlike the “active” portfolio managers’, use a buy and hold strategy. This approach provides long-term investors with lower expenses and turnover. Index funds have lower costs which can give the investor better performance long-term.
Index funds are considered “passive” investing. These funds hold a broad range of common stocks, with its’ goal, like actively managed mutual funds, to achieve diversification. Many beginning investors choose Index Funds. However, investing “solely” in index funds is not always the best investment choice for the more experienced and active investor.
ETF’s
The third way to invest in stocks is with ETF’s which stands for Exchange Traded Funds. ETF’s are traded on the stock exchange and trade like stocks. There are also ETF’s for Bonds, International funds, and other asset classes. ETF’S normally charge “lower” fees than mutual funds. Exchange-traded funds also have fewer taxes than mutual funds. Like mutual funds, ETF’s will keep your portfolio well diversified.
Vanguard brokerage services offer low-cost ETF’s. For example, you could purchase the Vanguard Total Stock Market ETF (VTI) for a low expense ratio of 0.04%. This fund owns large, mid-cap and small stocks with a greater weight placed on large companies. Many individuals “new” to investing choose ETF’s.
Do-It-Yourself Investor:
A fourth approach and my favorite one is the “Do-It-Yourself Investor. Investing yourself does require some accounting knowledge (however, not absolutely necessary), lots of reading and adequate research. And, with technology today, its’ never been easier to research a company online! It is well worth the time to learn about investing in order to maximize your investment returns.
In conclusion, I, personally, am not satisfied with “average”, or, “below” average returns that an investor gets with actively managed funds, passive index funds or ETF’s. I have managed, over these past 6 years, as a “Do it Yourself” investor, to beat actively managed mutual funds and the S & P 500 Index returns.
In my effort to teach others “How To Invest In Stocks” I have created a website: @ lindasstocks.com. Read and study all of my articles and you will be well on your way to becoming a successful investor! Also, feel free to join my Stock Group on Facebook @Linda’s Stocks.
