For the vast majority of investors, index and mutual funds are the preferred way to gain access to the stock market. In general, mutual funds are a pool of investments funded by shareholders that trades in diversified holdings which are selected and managed by a professional. Index funds are a pool of investments that match or follow a well-known market index. The most common example is the Standard and Poor’s 500.
There are many benefits that these funds offer for investors. It is still important for you to do your research and determine which funds are best for your circumstances. Some funds end up costing investors too much in load fees and other hidden expenses. It is so it is critical to understand all of the fine print. Index funds have brought significant competition to mutual funds since they typically have ultra-low fees and low portfolio turnover.
Index and Mutual Funds – Avoid Common Mistakes
When it comes to investing, avoid the things that end up costing people the most. This includes being in the wrong investments, excessive trading, trying to time markets, and excessive fees. With careful preparation and a long term view, you can keep more of your hard earned money. You also need to guard against emotion and impulse.
Look for the following criteria and demand quality when making your choices!
Simplicity – it should be easy to understand and contain investments that you can clearly identify.
High Quality – it should contain well known products that have a strong track record with data to back it up.
Easy Management – Instead of having to watch the stock ticker on a daily basis worrying about an individual stock, make sure your plan is structured so it only needs small tweaks along the way, based on life changes and events. Look for investments that fit your time horizon. Do not overreact to market cycles and the constant doom and gloom from some so-called pundits. Try to imagine your portfolio like a car that runs great and has a lot of life left in it. Think of an annual tune up and oil change, not an engine and transmission repair.
Accessibility – you should be able to get access to your funds quickly and easily. Management should be possible without a great deal of difficulty.
Cost-Effective – Excessive fees take your hard earned money. They go to the company managing your plan just for the privilege of using their product. It is very difficult for a fund with high fees to provide a superior return.
Flexibility – you should have access to a variety of products that meet all of your investment horizons and goals.
Watch For the Lure of Wall Street
The financial media and Wall Street do not like to focus on the above criteria. Why? Because they do very little to boost sales and stir emotion. Which is more exciting, the tortoise or the hare? Who has more flash and charisma – the professor who presents 50 years’ worth of academic research and time-tested data on an asset class or the salesperson with the high-powered suit and tie and colorful charts and graphs?
It is a lot more exciting to see breaking news about a hot new stock pick or an exclusive new fund that everyone will be clamoring over to gain access to. Simple and easy with low fees is not a recipe for big profits and huge commissions.
The magazines and TV shows that generate big ratings and huge advertising profits wouldn’t last very long if all they focused on were methodical, disciplined investing. Remember, the more you take the advice to do something different, the more other people make money – whether it is in your best interests or not.
Despite the challenges, there is a lot of good financial media out there and a wealth of knowledge available on the internet. It can take a lot of time and effort to sort through the various outlets and decide what is best for you. You will get a good feel for what is based on fact and reality over what is based on hype and illusion.
Index Funds – Remember Your Bottom Line
The bottom line is what always counts in the end. If you are not confident in the information you are getting, look for people with high integrity who will help you sort things out. Look for information that teaches rather than tries to pressure you into a certain “solution’. You and your family are worth the investment of your time and energy. If you need some guidance on getting started, I am here to help! My book “Financial Muscle for a Lifetime” covers this subject in depth. Remember, a rock-solid investment portfolio does not have to be complicated!