personal wealth health
Set the Odds in Your Favor
Follow this tried and true insight when investing in the stock market.
WILLIAM J. LYNOTT
No magic formula for investing in the stock market exists. Still, many decades of experience and insight can help the average investor improve the chances of coming out ahead of the crowd.
Here are four investing guidelines to follow:
1 Consider mutual funds.
If you find that making sense of the unrelenting flow of statistical data on every individual stock is almost impossible, then it makes sense to stick with mutual funds for their equity investments.
2 Avoid actively managed funds.
Careful observers have noticed that it has become increasingly difficult, if not impossible, for any active fund manager to beat the market through the long term. Worse, it’s virtually impossible to determine in advance which lucky manager will beat or even equal the market in the future.
So, stick with passive funds (index funds) that are constructed to match or track a market index, such as the Standard and Poors 500 Index (S&P 500), or one of many others, such as the Dow Jones Industrial Average (DJIA).
Also, with no highly paid manager in passive funds deciding which stocks to buy, the operating costs for index funds are generally low. (For more information on investing in index funds, log on to www.investopedia.com/university/indexes/index8.asp.)
The total cost of expense ratios adds up each year.
3 Consider exchange traded funds (ETFs).
Despite many similarities between regular mutual funds and ETFs, the differences are important. An ETF does not have its net asset value (NAV) calculated at the close of the market each trading day like a regular mutual fund does, because it trades like a stock. That means you can track the daily price in real time without having to wait until the following day to learn the amounts involved in your buy or sell orders.
Another advantage: ETFs provide the diversification of index funds with expense ratios that are lower than those of the average mutual fund.
4 Don’t forget expense ratios.
The expense ratio, or the cost of owning any mutual fund, covers operating expenses, such as investment advisory fees, administrative costs and distribution fees.
A mutual fund charges the expense ratio (typically 1.5%), each year regardless of the market’s status, while the expense ratio of a typical index fund averages around 0.25%. Some index funds are even lower, such as the Vanguard 500 Index Fund with a current expense ratio of about .18%.
Expense ratios have the direct effect of reducing the ROI in mutual funds or ETFs. Despite the seemingly modest annual fee of 1.5% or less, the total cost of expense ratios adds up each year.
You can search the Internet for information on any fund or ETF by its ticker symbol of three to five letters. Also, you can find a fund’s expense ratio in the fund’s prospectus. If you own the fund, the prospectus is mailed to you each year or delivered electronically. OM
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.