Mutual Funds, Index Funds, ETFS, Oh My!
I see you, girl. You want to travel, do brunch, and buy those shoes. But you also know you should be planning for the future.
You even know that your company offers a 401K. But it’s all so overwhelming. Obviously you’d rather spend your free time watching The Bachelor than plotting out your investments.
I get it. Just remember that at the end of the day, the number one goal of investing is to make you money so you can accomplish all those #lifegoals. If that’s not a motivator, I don’t know what is.
Here’s how to get started (so you can get back to those red-bottomed Louboutins).
First, the basics.
You make money off of investing when your portfolio is estimated to be at a higher value, or breaking even, with what’s currently going down in the market. There are three different vehicles you can use when investing: mutual funds, index funds, and exchange-traded funds (ETFs). All require you to own some mix of stocks and bonds. How you mimic or beat the performance of the market is dependent upon which vehicle you choose.
A mutual fund is when you allow an investment firm to manage your portfolio, attempting to outperform the market. A portfolio manager (who’s hired by the investment firm) will purchase and trade stocks they think will perform exceptionally well in an effort to grow your investments.
An index fund is a set of stocks purchased together that are set up to mimic the overall market return rate, known as a benchmark. When you purchase index funds through an investment firm, they still handle the purchasing and trading of your stocks, just less frequently. Think of this as a “set it and forget it” money move.
The last vehicle is called an exchange traded fund (ETF). ETFs are considered a type of index fund because the stocks are purchased as a set, but they’ve got one major difference. Instead of letting an investment firm handle the funds, you actively manage them yourself in a private brokerage account. Time to put on your big girl pants!
So. Much. Stuff. What’s the difference?
Fees! Fees is probably the number one difference between all three. Since no one is actively managing them (except you!), index funds are considered the cheapest investing option. Mutual funds usually have a flat rate per amount invested, but ETFs have one every time you trade. This is really important because gains (what you earn) can be eaten up by fees when trading often with ETFs. Keep that in the back of your mind before you start your own production of The Wolf of Wall Street.
Oh yeah, and…
There are also different levels of risk involved when trading. It’s not exactly Game of Thrones out here, but there’s definitely something to be said about the “win or die” complex with the stock market.
Index funds are historically safe, while mutual funds tend to perform higher. ETFs are considered the riskiest of the three because you’re taking sole responsibility for the picks. So, if you aren’t well versed in stock picking, it might be rough until you get the hang of it (like, lose your money rough).
Hmmm, I’m still on the fence.
That’s cool and all, but remember, the more time your investments have to grow, the better off you’ll be.
When you feel ready, you have options. Check with your HR representative at work to see what your company offers in terms of a 401(k). Speaking to a certified financial planner is always a good choice. And as always, check out Nav.it for more tips on how to handle your cold hard cash.