In our last chapter of our financial stability column, we covered how to invest through stocks, dividends and index funds. Today, we’ll be touching on the basics of mutual funds, exchange-traded funds and Robo-Advisors.
Similar to the index funds we covered in our previous column entry, a mutual fund allows investors to pool money from multiple investors to purchase a diversified portfolio of financial securities such as stocks and bonds. While index funds are more passive, with lower turnover (purchases and sells) by you as the investor, mutual funds often have professional investors working for you to buy and sell as often as they can with their goal to “beat the market”.
Although mutual funds tend to be more risky than the index fund, on average, it has a higher return rate, which might be more appealing to investors who are looking to earn money quicker. If you’re looking for a more steady form of income however, index funds might be the better option.
While many investors have aspirations of beating the S&P 500 and maximizing their returns, there are very few that actually do. That’s because picking individual stocks is oftentimes a risky business, one with the potential to mint you as the next millionaire or leave you with pennies and scraps in your bank account.
This is where exchange traded funds (ETFs) come in. Instead of spending hours researching individual company financials, looking at their latest medicine release or even scanning their charts, ETFs give you the option to invest in multiple companies at once.
The difference between ETFs and mutual funds or index funds is that ETFs trade like normal stocks. You can buy and sell them multiple times throughout the day, and their price functions as the stock of one company would.
However, their price is dependent on the price of the stocks in their basket. This means that instead of putting your life savings into one stock, you are putting them into a group of 50 stocks which safeguards your money a little more. The potential for loss is minimized because you have now diversified your portfolio, giving it a taste of multiple sectors and not relying on specific catalysts to spark stock moves.
There are many different ETFs to invest in. Popular ones include VOO (Vanguard S&P 500 tracker) which tracks the general market and if you hold it for a long time, it is bound to go up. This is because the market moves in waves and cycles, yet over time, history has proven that innovation and economic growth keep markets in a consistent uptrend.
If you are looking for more risk, investing in an ETF such as QQQM, which tracks the top 100 companies in the Nasdaq, or any ETF holding fewer stocks could be the move for you.
Beginning investors are strongly recommended to invest into ETFs to minimize potential capital loss. Because they trade like regular stocks, they are simple and easy to learn. Two key metrics to look at when choosing an ETF are its annual fees (companies who compile these ETFs have to make money somehow) and its annual growth rate (how it compares to other ETFs).
While having the freedom of making your own decisions can be exciting, it can be incredibly stressful, especially if you’re a beginner. And although mutual funds allow you to invest in the hands of a professional, it can take a hefty price to pay.
If you’re looking for a low-cost, low-commitment way to start investing, Robo-Advisors offer an online program that allows your funds to follow an automated algorithm integrated with financial advice and investment management services at a low price. Great for hands-off investors who want to invest but don’t have enough time, it’s also effective for people who have lower initial investment asset balances.
To sign up, you are usually required to fill out a questionnaire describing your goals and financial situation (ie. retirement period, buying a house, time horizon and risk tolerance). Using all this information, the Robo-Advisor then pulls together a diversified portfolio of low-cost mutual funds and/or ETFs. Over time, the portfolio is monitored by the online algorithm and kept to align with your financial goals. A few top rated Robo-Advisors include Fidelity Go, Schwab Intelligent Portfolios, Betterment & Wealthfront, Betterment & Wealthfront.
Mutual funds, ETFs and Robo-Advisors are highly suggested by professionals as they often have a great return on investment, but also are great for experience. As the markets continue to fluctuate and headlines shift as a result of company and economic changes, it’s important to gauge what’s best for you and your financial goals.
Investors who are most successful are often those who don’t chase every opportunity, but rather pick a strategy that aligns with their situation and is able to commit to it. We hope today’s article brought you valuable insight. Next time, we’ll take a look at government bonds, corporate v.s municipal bonds and interest rates.
