For those interested in building wealth there are a multitude of different
investing options however for the average person
there are only a few that will yield them promising results
you see all too often beginner investors fantasize
about making incredible trades and achieving financial success overnight
but this is most often a dream and not a reality
in fact for beginners the hardest part is simply getting started
and this first step includes choosing the right fund to invest in
therefore in this video i will share with you how to invest for beginners
by walking you through three of the most popular financial assets
and if you're new to the channel then hit the subscribe button below for more
life-changing content in today's investing world there are a ton
of different investing options and as a beginner it can be hard to understand
which are worth your time and money and which aren't in fact when i first
started looking into investing i struggled to differentiate solid
investment paths from the bad ones i would hear about stocks and bonds and
had a little idea what all these financial terms meant
one aspect i learned about early on in my own investing journey was
diversification and how you can spread out your risk
when investing in essence by diversifying you will save yourself the
heartache of losing everything if the company you're invested in
crashes to the ground not losing all my hard-earned money seemed like a great
strategy for a risk-averse investor like myself
which led me to focusing my investing efforts on three types of funds in
particular index funds mutual funds and exchange
traded funds otherwise known as etfs all three of these types of funds have
yielded me great returns over the years so let me explain what each one of them
are and how you can use them to grow your own
personal fortune so first what is a mutual fund
a mutual fund is a basket of diverse assets which includes bonds and stocks
traditionally the investors hire an investment company to manage this basket
of assets mainly because they the investors don't
have the knowledge or time to buy and manage such a diversified portfolio
themselves with a mutual fund the investor is
charged a fee around one percent of the money invested
annually this means an investor will be charged
two hundred dollars on every twenty thousand dollar
investment as it is with most stock funds
holdings are picked by the portfolio manager purely based on his or her
assertions of which stocks he or she believes will do well this is known as
active management next there are index funds index funds
take a different approach from mutual funds
in this case the portfolio manager doesn't pick out only the stocks he or
she believes will do well they buy all the stocks in a particular
index examples include standard and poor's 500
index of large company stocks or the russell
2000 index of small stock companies the purpose of index funds is to
replicate the performance of an entire market index funds are
inexpensive to operate mainly because they are bought and held
and they require minimal third-party management for example the
schwab s p 500 index charges a 0.02 charge on annual investment
sums meaning a two dollar charge on every ten thousand dollar investment
growing by definition when you own all the stocks belonging to a particular
market you will only earn the average of the
stocks in that market this may seem unappealing to one who is
new to the stock business but it is not so for many experienced
investors studies have shown that the huge
expenses that come along with active management
as well as the difficulty in consistently predicting which stocks are
going to do well or not make it hard for funds to stay ahead in
the market this is one major advantage index funds have
over mutual funds finally there are exchange traded funds or etfs
an etf is a particular type of index fund that is not sold directly by fund
companies rather they are listed on the exchange and it
is required that you operate a brokerage account to buy
and sell stocks etfs used to be expensive for investors who wanted to
hold them for the long term being that they had to pay a commission
each time they wanted to trade however that has started to change in
recent years being that many online brokers now offer free trades to their
customers on stocks and etfs now that you are
aware of what each of these funds consists of
it's time to go over the pros and cons of each so that you can make the
best decision possible when starting your investment journey
let's start with the advantages of mutual funds the first advantage of
mutual funds is the diversification of risks
every stock carries three different types of risk company risk
sector risk and market risk company risk and sector risk fall within the bracket
of unsystematic risks while market risk
falls under systematic risk a company's stock price may drop if they
are not doing well financially regardless
of whether the market prices go up on the other hand the company may still
suffer a drop in the price of stocks when the market crashes
even if the company itself does well financially with mutual funds
investors can dodge unsystematic risks by exploring different sectors
and investing in diversified portfolios within them
the second advantage of mutual funds are the smaller capital outlays
mutual funds involve merging individual investors funds together which means a
reduced amount of capital investment required by each individual
this ultimately reduces the investors overall risk
usually investors require substantial capital to own a diversified portfolio
of stocks but with mutual funds investors can have a
diversified portfolio with a slightly smaller
capital outlay the third advantage is investment expertise investing and
earning good yield from the stock market requires years of experience and
expertise with mutual fund investing experts are
hired to manage the funds and these experts can tell which stocks
are potentially profitable in the short and long term
the fourth advantage are the economies of scale and transaction costs
mutual fund investors can save considerable amounts of money from
transactions on a per unit basis this is because mutual funds trade
securities in large volumes keep in mind that transaction costs on a
per unit basis are much lower than what investors will incur if they trade via a
stock broker the fifth advantage is the variety of
products you can choose from with mutual funds investors are offered
a variety of products which match their risk profiles and
investment goals besides equity funds there are also
monthly income plans balance funds and liquid funds
these will cater to a variety of investment requirements
the final advantage of mutual funds are the different modes of investments
as for flexibility regarding investment and withdrawal methods
mutual funds give investors an advantage there are different investment modes
which investors can choose from these include lump sum systematic
investment plans and systematic transfer plans
from other mutual fund schemes for those investors who are interested
in compound returns over the long term they can invest in the growth option of
mutual funds they can also invest in dividend options
that's if you want constant short-term returns from your
investment there are no other investment products
in the stock market that provides a diverse means of investment modes
now as you can see there is a ton of upside in investing in mutual funds but
we must also assess the downsides with the first being the lack of control
over your portfolio when you are invested in mutual funds
you hand over control to trusted experts who are expected to make the right trade
decisions on your behalf then there are capital gains when stocks
are traded the investor is taxed on his or her gains
with mutual funds however the investors taxed when the funds distribute gains
made from the trade of individual holdings even if you didn't sell yours
finally there is over diversification being well diversified means a reduction
in risk of losses but it could also mean a potential
reduction in profits as well the more securities an investor owns the
less they would feel the impact on their portfolio as a whole
moving on there are many reasons to invest in index funds and here are the
top three first there is the wide array of
diversification with index funds your portfolio can be
well diversified which means putting your eggs in several baskets
if one of these baskets falls you only lose a few eggs allowing you the
privilege to be diversified and lowering your risk of losing all the money you
invested next there are the low fees for those
new to this topic there is something called an expense ratio
expense ratio refers to a yearly charge that all fund holders are required to
pay this is a percentage of the total assets
of the investment this is usually a very small sum of money for
instance if you have invested a thousand dollars in mutual funds
at an expense ratio of one percent you are required to pay
ten dollars annually to own it finally there is its return compared to actively
managed funds as history has proven the most
experienced and most skilled portfolio managers cannot make
actively managed mutual funds that perform index funds
research has shown that within the past five years only 23.51
of actively managed mutual funds do better than the s p
500. now like mutual funds there are some downsides to investing in index
funds with the first being market
capitalization waiting let's assume a wall street expert predicts that the
microsoft stock value is going to increase and it is expected
that professional investors will buy the stock
the higher the stock price the bigger the market capitalization for microsoft
hence index funds will allocate more cash to
purchase than microsoft stocks but there is a risk here what if
something goes wrong and the company runs into some trouble and the stock
crashes professional investors would get it as
quickly as they can and minimize losses but index funds being a robot that
purchase the microsoft shares on your behalf
will lose the money as the stocks decline in value next is the fact that
you're investing in companies you may not understand ask
the average american index fund investor which companies they are invested in via
their retirement account and they'll probably be left scratching
their head this is to be expected since they are not actively participating
in the buying or selling of their stocks in fact this leads to the final drawback
of index funds which is the lack of accountability it
is projected that over the next 10 years more than half of the american stock
market will be made up of robot index funds the
sad part is if everyone owns bits and pieces of
every company who's to be held accountable
when the need arises last but not least are etfs and here are the pros and cons
of this type of fund the first advantage is the flexibility
and trading that it offers trading etfs is almost instantaneous and
the trader can move money quickly between different asset classes
next is the portfolio diversification and risk management
over the years etfs have become increasingly popular and they are now
widely traded on basically all major asset classes and currencies in the
world this includes the japanese yen the british pound and the australian
dollar final etfs generally have low fees
etf operations costs are significantly lower than open-end mutual funds
the reason for this is any expenses related to the client service
is usually incurred by the brokerage firm that holds the exchange traded
securities in customer accounts compared to the
other types etfs have one major drawback which is when there is a tracking error
before you buy an etf it is vital you are sure of what
underlying security ztf is tracking after this is done there are some
tracking errors which you have to accept this ultimately means that the etf does
not perform exactly how its underlying securities or benchmarks perform
there are several reasons why tracking errors occur differences in timing when
rebalancing the underlying portfolio bids and offers are among such reasons
you can protect yourself from this by checking the tracking error for the etf
against its benchmarks over the last couple of years
so there you have it the pros and cons of three of the most beginner friendly
funds now it is up to you to weigh the
benefits and costs to determine which is right for you thanks for
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