We just explored what a stock is, and why investing in individual stocks is an extremely difficult growth strategy. Let me be clear: I love investing as a way to grow wealth.
But...there's a smarter way than betting on individual stocks, hoping you magically selected the winners from the losers. Mutual funds are one investment vehicle that allow us to buy many, many stocks in just one purchase. I prefer these to individual stocks because you can own hundreds of companies in each share. This helps you avoid one of the money mistakes I've made - investing in one company and losing everything.
However, there’s a twist. All mutual funds are not equal. Mutual funds can be designed to fit different types of investment goals. My favorite are mutual funds that mirror a large, diverse market. One example is the Vanguard 500 Index Fund (ticker symbol: VFINX). In full candor, I prefer Vanguard and most of my million-plus of invested assets are in Vanguard funds and ETFs (we’ll explore those next.)
One share of VFINX includes just over 500 companies, including Apple, Berkshire Hathaway, Procter & Gamble, Starbucks, Goldman Sachs, and Southwest Airlines. Funds like VFINX are low cost because they don't employ lots of people trying to analyze stocks and beat the market. Instead, this fund automatically includes the 500 largest US companies. This saves you money!
Here's what to watch out for when picking mutual funds:
What's the expense ratio? This is how much the company that manages the fund charges you for their work. An average expense ratio is around .6% - meaning, for every $100 you have invested, the fund rakes in 60 cents. Sounds small - but tiny fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is .12% - meaning, for every $100 you invest in a Vanguard mutual fund, they charge 12 cents. That’s much, much lower, and lets you keep more of your hard-earned money.
Are there other fees? It can be costly to create fancy, actively-managed mutual funds. So, look carefully for purchase or redemption fees, or 12b-1 fees (marketing or distribution fees.) Ask, ask, and ask again about fees before investing!
What's the 10-year return? How did this fund perform over the last decade, compared to the S&P 500? The S&P 500 is a very common performance benchmark because it includes the 500 largest U.S. companies. If the mutual fund seriously underperformed the S&P 500, it may not be worthy of your hard-earned money.
What are the initial and ongoing investment minimums? Funds typically have initial minimums, or a certain sum of money to start investing. VFINX has a $3,000 minimum for general investors, meaning you first have to save $3,000 before you can begin investing. Don’t let minimums discourage you! Save up and once you get that minimum, invest. On an ongoing basis, VFINX has a very low “additional investment” minimum; you can add to your account in increments as low as $1. So, clearing that initial minimum hurdle is worth it.
It's easy to get overwhelmed. We explored markets and stocks, and are digging into different types of investment vehicles. But, think about it like this: if you stop reading now, pick a mutual fund with low fees and good long-term performance to regularly invest in, you're seriously ahead of the game. Do not let your quest to make perfect decisions paralyze you (or your wealth). In fact, I’ve broken down exactly how to start investing in just four steps.
What other mutual fund advice do you have? Which fund(s) do you own? I look forward to seeing you build your nest egg with smart, low-cost investing! You got this.
xoxo, Ms. Financier