4 Different Ways To Invest In Stocks
There are 4 different ways an investor can choose to invest in stocks. An investor should decide which of the following approaches are best for their individual needs. Following are the four different ways to invest in stocks.
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 or 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.
A mutual fund will hold hundreds of different securities and invest in many 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.
The second way to invest is by investing in an Index Fund. The 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. However, investing “solely” in index funds is not always the best investment choice for the more experienced and active investor.
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. They normally charge “lower” fees than mutual funds. These exchange-traded funds also charge 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%. Moreover, as of this writing, J.P. Morgan plans to charge just 20 cents for every $1,000. invested in a stock fund.
The fourth approach and my favorite one is the “Do-It-Yourself Investor. Investing yourself does require some accounting knowledge (however, not absolutely necessary), reading and adequate research. And, with technology today, its’ never been easier to research a company online yourself. It is well worth the time to learn about investing in order to maximize your returns.
In conclusion, I, personally, am not satisfied with “average”, or, “below” average returns that an investor gets with actively managed funds or passive index funds. Both of these funds do not have great returns! 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.