Investing in stocks is a lot of work, and especially if you think that trading alongside the T.V. pundits is the only way to play the game. If you have better things to do than sitting around and trying to decipher which stock will be the next big thing, I have an investment strategy for you: tactfully use mutual funds to play the market while minimizing fees along the way.
Why mutual funds?
Mutual funds are pools of investor money managed by professionals who seek to invest in a variety of different strategies depending on the fund. Some mutual funds seek to match the performance of the S&P 500; others play in the bond market. Still others invest in foreign markets.
Some use leverage to boost returns. Others may bet on the market declining. Whatever strategy, market, or asset you can think of, there's more than likely a mutual fund for it.
This is tremendously useful for easy, lazy investing. Instead of having to spend hours studying SEC filings and financial statements like Warren Buffett, or analyzing day-to-day market movements with pseudo-science chart analysis, you can simply choose a mutual fund or three, and let the professionals take care of the rest.
Want to invest in the Dow Jones Industrial Average? Don't waste your time buying all 30 of the component stocks. Instead, just buy a mutual fund that tracks that particular index.
That's all there is to it. Set it and forget it.
Not all mutual funds are created equal
I know, you're probably already pretty fired up about this whole mutual fund thing. It's so easy! Before you dive in, though, there's a little more to discuss. Not all mutual funds are created equal, specifically when it comes to fees.
All mutual funds charge a basic management fee charged annually; the average is somewhere in the 0.75%-1.25% range, calculated as a percentage of the assets in the fund.
It's understandable that the fund would charge a fee -- it has to pay its staff and keep the lights on. However, sometimes that management fee can be upwards of 2% of the assets under management. If you have $2 million invested, your annual fee at 2% would come to $40,000. That's expensive.
Worse yet, some mutual funds will hide a whole host of other fees in the fine print. Trading fees, loading fees, and potentially a whole host of others. Altogether, you could be paying 3% or more.
Think about that for a second... potentially 3% of all your money in expenses, every single year. If the market returns 7% one year, that means your actual returns could be just 4% after that big fee. Factor in inflation at 2% or 3%, and you're barely making any money at all.
In down years it can be even worse. You lose money in the market, and you still have to fork over fees to the fund. Talk about kicking a man while he's down!
That's why it's so critical that you select mutual funds with low fees. Most often, a special type of mutual fund called an index fund is the answer you're looking for.
The beauty of the index fund
With an index fund, you can select a mutual fund that will track a specific market index. It could be the S&P 500. It could be the Dow Jones Industrial Average. It could track U.S. Treasuries or corporate bonds.
Because the fund is seeking to track a known index, there isn't a need for expensive money managers or high operating costs. Computers do most of the work automatically. For you, that translates to considerably lower fees, sometimes as low as just 0.10% of your investment.
During the entirety of your investing life -- 10, 20, 30 years or more -- the difference in fees alone can translate into hundreds of thousands of dollars.
At the end of the day, if you want an easy but powerful strategy to make money in the markets, the best place to start is with a diversified handful of low-cost mutual funds.
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