Whenever I’m asked by someone who is just starting out investing for their retirement what they should invest in first I always give them the same answer, and that answer is index funds. Then the next question will inevitably be “what is the best index fund?” The answer I give is SPY which is an index fund that is set up to track the S&P 500. The S&P500 is and index made up of 500 large cap companies chosen by the company that runs the index, their name is Standard and Poor’s. There are a number of reasons that I recommend this to new investors. The first one is that it will automatically give that investor diversity of their portfolio which is one of the most important things to do for the beginner investor.
Diversity simply means owning multiple stocks so if one of the stocks were to drop in price significantly your overall portfolio will not be hurt as much because that one stock only makes up a small percentage or your overall investments and one of the other stocks might rise in price to make up for the other one. The opposite of diversify is to invest all of your money in one stock or asset or putting all of your eggs in one basket.
The other reason I always recommend this fund is because like all other index funds you will be paying a lower fee. You will be paying a lower fee because the people responsible for running an index fund have lower costs because all they are doing is matching what stocks are in the S&P 500 instead of going out and paying people to actively study and analyze all of the stocks to try and find just the best stocks to buy. Considering that when people try to beat the market more often than not they fail I see no reason to pay them to do so.
For someone who is just starting out to invest on their own there are a lot of terms and meanings that they will need to learn before they can confidently invest in the market. One of the first things they should learn is the difference between mutual fund investing and an index fund investment. First off what both of them have in common is that they are both a collection of stocks or made up of different stocks from different companies. Even though you will be buying one mutual fund or one index fund you will actually be buying a number of different stocks. One of the reasons they are so popular is because it allows anybody to diversify (diversify is another term that the new investor should familiarize themselves with before investing) their investments cheaper and safer than it would otherwise.
The difference is what makes up a mutual fund and what makes up an index fund. What stocks make up a mutual fund depend on what stocks the person or persons running the mutual fund decide to buy. There are usually some rules in place on what they can and can’t buy for example all of the stocks have to be on the S&P 500 or in the Dow ect. but other than that they will be able to buy any stocks and at what percentage of the whole fund that they think is best. Index fund investing on the other hand is simply trying to match the performance of a certain fund. For example again the S&P 500, so instead of buying any stocks that they want in the S&P 500 they will buy exactly what is in the S&P 500 so that the performance of the fund will be exactly the same as the performance of the S&P 500.
When looking for financial advice online is it best to as skeptical as possible. There are plenty of people out there claiming to be experts who have full proof or guaranteed systems for picking stocks and making it rich by investing in the market. The fact is that anyone claiming to have a sure thing when it comes to picking stocks probably doesn’t really have any idea of what they are doing and even though there system might be working for them now eventually it will fail and if you have all of your money riding on this one scheme you’ll will eventually be in big trouble.
Any true expert will tell you that no one can tell you exactly what the stock market will do. Studies have shown that even past performance of a professional investor doesn’t have any bearing on whether they will have continued success in the future. For example if you have to professional investors, one who has been very successful over the past couple of years and made a ton of money and another investor who has had a rough couple of years and lost money; statistically the one who has had the rough year will have just as much a chance as having a successful over the next year as the one who had been successful. The same is true if you turn it around the successful investor will have just as much of a chance to lose money as the other one.
So what does this tell us? Well it should show you that unfortunately luck has a lot more to do with picking stocks then most would like to admit and second that there is no such thing as a sure thing when picking stocks. So when looking for financial advice online make sure to stay away from people claiming to have all of the answers.
If there is one thing that I learned while earning my degree in Finance is that nobody really knows what they are doing when it comes to picking stocks. There are plenty of people who claim to know what is best and when times are good they do look like the geniuses they claim to be; but when times are bad these so card geniuses true colors come out and the world get to see how smart they really are. No doubt this latest financial meltdown has shown a us how smart some of these people really are.
In fact only 25% of professional money managers are able to outperform the market on average every single year during good times and bad. That means that 75% of professional money managers underperform the market every single year, year after year. Vegas offers better odds then that. Putting your money on black on the roulette wheel at least gives you a 50-50 shot with these so called pros your only getting a 25% chance at beating the market. I don’t understand why people pay such a high price for financial advice that will earn them less money than if they would have just bought themselves an index fund matching the market. Not only would it be a whole lot cheaper but chances are you would earn a better return.
So when my friends ask me for finacial advice the first thing I tell them is to stay away from so called professional money managers. Get an online trading account and just buy and index fund that matches you desired level of risk and sit back and let the market do the work for you. Don’t waste your money on someone who will just end up losing you money.