Investing In The Stock Market

There are many people out there wondering what they should be doing to grow their wealth.  There is no single best way to invest money, but there are a lot good options.  What option you choose depends on your personal goals, time lines, and risk tolerance.  Some will prefer to take a more active role in their investments, other prefer to keep things passive.  With that being said, here are some good ways to invest your money.

Invest In Mutual Funds

For many people, this is probably the best option.  By investing in mutual funds, you are reducing your involvement with your investments, freeing up your time for other activities that are more important to you.  There are two major types of mutual funds:  managed, and unmanaged.  Managed funds employ a professional fund manager to buy and sell investments within the fund.  In exchange for this service, he receives a salary, collected as a fee from the purchasers of the mutual fund.   The idea here is that he will make more money for the fund than he costs it in management fees.

Often, though, this is not always the case, and this is where unmanaged funds come in.  Unmanaged mutual funds, rather than having a manager picking the stocks, blindly follow a certain stock market index.  For this reason, unmanaged funds are often called index funds.  The most common index for funds to follow is the S&P 500, but there are funds which follow pretty much every other major index out there.  The low expenses (no fund manager, you see) can make these an excellent invest choice.  I’ve written before about investing with index funds, so be sure to read up that to learn more.

Invest In Stocks and Bonds

If you’re looking to take a more active role in your investing plan, you can research and purchase individual stocks and bonds.  If you choose well, you can grow your money quite effectively.  In order to take this approach, you will need to learn how to buy and sell stocks, as well as determine the best stocks to buy.  If you can do this effectively, individual stocks and bonds can be a very good investment strategy.

Invest In A Business

Want to get really active in your investing?  Try investing in a business, either yours or someone else’s that you are extremely familiar with.  This is often the very fastest way to grow your money, but it is also the riskiest.  Unless you are very familiar with what makes money and what does not within your business, be careful about  throwing money at it.  Money doesn’t do you much good without a solid profit plan.  If you do it right, though, no other investment will give you the same return as a good business can.  However, you will spend much more time managing this sort of investment than any other.

Conclusion

As you can see, there are many different ways to invest money,  each with their own associated risks levels and rewards.  To determine the best investment strategy for you, be sure to take a good hard look at your own risk tolerance and the amount of time you are willing to spend.  With that being said, don’t over think things so much that you never start investing!  Make a decision, and start investing as soon as you can.  Time is your greatest asset in the world of investing, so use it wisely.

Photo credit: BAD RABBIT INC.

While some investors are comfortable with going for more exotic investing options such as penny stocks, most people are better of with more traditional investing styles.  One of the best ways for a regular investor to start investing in the market without having to spend every waking hour obsessing over their trading account is to invest with index funds.

To recap the idea behind index mutual funds, they are basically a fund that simulates an entire sector of the stock market, or in some cases, entire markets.  For example, there are several very popular index funds that follow the S&P 500 index.  This means that however well the S&P 500 performs, that’s how well the index fund does.  Index funds provide the ultimate in diversification, since they hold a very broad range of stocks.

Now, if you’re new to index funds, you might wonder why you would buy a fund that can only do exactly as well as the market.  After all, isn’t the idea to beat the market?  As it turns out, beating the market is much harder than most people think it is.  You might think you can beat the market buy reading the financial news everyday and making a few trades, but the truth is that you probably can’t.  Even most professional money managers have problems beating the market, and most under perform.  Index funds will never under perform, and they couldn’t be any easier to invest in.  Think of it as a tortoise and the hare type situation.

So, assuming you’re sold on investing with index funds, what are the best index funds to invest in?  The answer to this question has two parts.  First, we will talk about what implementations of a given fund you should be choosing.  For example, of the many S&P 500 funds, which one should you choose?  Secondly, we will talk a bit about asset allocation, which tells you what general type of index fund is best for you.  That is, should be be invested in the US small caps, or foreign growth stocks?  Not an easy question, but we’ll take a look at it.

So, let’s talk about fund implementations.  Every mutual fund, including index funds, has something called an expense ratio.  Expense ratio represent the cost associated with running the fund.  In the case of managed funds, this helps pay the fund manager and pay the trading commissions.  In the case of index funds, there is no manager, and trading is automatic.  Thus, the expense ratios are very, very low, allowing you to keep more of your own money.  This is a good thing, I think we can all agree on that!  In light of this, you should choose an index fund with the lowest expense ratio possible.  This information should be readily available in the fund’s prospectus.  Vanguard index funds are known to be some of the lowest in cost out there, but check into the expenses for any fund you buy and compare, just to make sure.  This will save you surprising amounts of money over the long run.

Now, let’s talk about buying the best index funds from an asset allocation perspective.  This is a huge topic that I can’t possibly cover fully here, but let me try to sum it up in a word: diversify.

Yep, that’s right.  Don’t buy into a biotech sector index fund because you think they will do well.  Don’t buy all emerging market funds since you think the rest of the world has a lot to grow.  Don’t even buy the US stock market, since we all know that can down.  Instead, build a balanced portfolio across as many non-correlated asset classes as possible.  While parts of your portfolio are down, other may be up, reducing your volatile and increasing your potential returns.  With the diversity afforded by index funds with a diversity of asset classes, you should be able to weather many market storms.

I highly encourage you to keep researching asset allocation.  Finding a good plan and sticking to it is the easiest way for most people to invest with index funds.  In short, there is no “best index fund.”  Rather, there are simply low expenses and solid asset allocation plans.  Stick with these principles, and you will surely do well.