New to investing? Don't sweat it. Learn 4 simple methods to investing with confidence so you build plenty of wealth for the future, regardless of how much money or experience you have.
2. Buy a stock index fund.
Index funds are a type of stock mutual fund that attempts to match or outperform a market index, such as the Standard & Poor’s 500 (S&P 500). They own large, diversified portfolios of individual stocks, which generally go up in value over time.
Index funds are managed passively, which means they don’t try to make quick gains by buying and selling underlying investments frequently. Owning index funds gives you an easy way to get broad market exposure. And since they don’t have teams of research analysts or high operating expenses, they charge relatively low fees.
3. Buy a stock exchange-traded fund (ETF).
On the surface, an ETF looks like a mutual fund because both are collections of underlying assets—such as stocks, bonds, real estate, commodities, currencies, or other investments—giving you affordable and convenient diversification.
But unlike a mutual fund, an ETF trades on an exchange (just like a stock), where you can track its price and buy or sell it at any time the market is open. With an ETF, you know the exact companies or assets you own because that information is available daily. With mutual funds, many only reveal their portfolio holdings a few times a year. So, ETFs never leave you guessing about where your money is exactly.
Like index mutual funds, the objective for many ETFs is to match an index, like the S&P 500, using a passive investing. As I mentioned, this is different from actively managed funds that aim to beat the market with various investing strategies and must pay management for ongoing research and transaction costs.
To get the job done, ETFs typically don’t buy and sell investments frequently or have as much overhead compared to large mutual fund families. The savings get passed along to investors.
So, when compared to average mutual funds, many ETFs charge lower fees. Additionally, many investment analysts have found that passive funds, such as ETFs and index funds, pay out higher returns over time than actively managed funds.
4. Buy a target date fund.
Target date funds, also known as lifecycle funds, are one of the newest and most innovative funds available.
Target date funds, also known as lifecycle funds, are one of the newest and most innovative funds available. You’ll see them offered by both mutual fund and exchange-traded fund families.
Target date funds own different types of investments (such as stocks, bonds, real estate, and cash) and the fund manager gradually shifts the allocation according to a selected time frame, such as your estimated retirement date.
You’ll know a target date fund because it typically includes a year in the name, such as Retirement 2030 Fund or Retirement 2055 Fund. The date should correspond to when you believe you’ll want to retire. For instance, if you’re 35 years old and want to retire 30 years from now, in 2047, choose the fund with the closest target date.
What’s so clever about these funds is that they have a “glide path” that slowly owns fewer stocks and more bonds the closer you get to the target date. Since stocks are the riskiest type of investment, it’s wise to own a smaller proportion of them and become more financially conservative as you approach retirement.
Because these target date funds already include a mix of asset classes (stocks, bonds, and cash), you only need to own one of them. The right amount of stocks is baked into the investment, making it an easy, one-size-fits all solution.