Mutual Vunds Vs Index Funds And Stock Trading

If you’re new to investing, it can be very confusing choosing the appropriate investment vehicle in which to invest.  It all depends on your risk tolerance.  Some people can handle the fluctuations of a turbulent market because they are thinking for the future with long term investments.  These people are usually young with time on their side.  For people closer to retirement, they generally tend to play it safe with bonds and money market savings.  These investor profiles are stereotypes of course because frankly, you can reduce risks simply by understanding what you are doing in the stock market.

When most people first start investing for themselves, they usually start with mutual funds.  When mutual funds were first introduced, they seemed like a great idea – a basket of stocks with a specific investment goal in mind for people who were too confused to choose individual stocks for themselves.  However, with the popularity of mutual funds, it became the same problem again.  How do you choose amongst the plethora of mutual funds?  And then there is the issue of management fees that eat away at the returns while the fund underperformed a benchmark index.  Or perhaps they performed just as well as the index but that was because the fund manager was a closet indexer.  This means that the mutual fund stocks were just replicating the index.  Again, investors had to ask themselves what they were paying the management fees for.

If you’re at this point of your investment knowledge and fed up with mutual funds that don’t provide adequate returns, invest in index funds that track a particular index.  At the very least, you’re going where the market is headed be it good or bad.

Or, if you’re very confident in your abilities to pick stock winners, now is the perfect time to invest as the world is coming out of its recession.  There are still stocks to be had for cheap.  And as mentioned, if you know what you are doing and you have a long investment horizon, you reduce the risk of losing money.  And frankly, with bonds and savings accounts not providing enough interest or mutual funds that charge fees without guarantees of making money, you really have to wonder where the risk lies with stocks.  At the worst, you’ll be losing your own money and not have someone else lose it for you.

Tags: long term investmentspick stock winners