How To Invest

If you are just beginning investing, you might be confused about all of the choices. In this economy you are probably a little leery of even investing. Over the long haul though, investing in stocks if your investment horizon is long term is the way to go.

Most new beginning investors get their feet wet beginning an investment program by starting in mutual funds. Mutual funds are a great way to get started in investing. However, there are a few things that work against you with mutual funds. The first is that for most mutual fund managers, they fail to outperform the market, the standard to which they are judged. In addition, most mutual stock mutual funds are fully invested all of the time whether the outlook for the market is bullish or bearish. This is OK if it’s a bull market, but a bear market may make the fund decrease more than normal making it harder to beat the market.

The other things working against investors in stock funds is that alot of the mutual funds have high expense ratios. These expenses put you at an immediate disadvantage, particularly if you pay a sales load up front. In a down market the expenses are even more of a burden and weigh down your returns.

In addition, transaction costs within a fund that has higher numbers of trades also increases expenses and the taxes you incur from any capital gains over time. With all of these things working against you, it’s amazing that anyone comes out ahead.

Picking individual stocks on your own can prove equally difficult and if you are looking at day trading as a beginner, you should know that transaction costs can eat up any earnings over time.

For most of us beginners, if our investment horizon is long term, stocks are the place to be but what is the best way to get started investing?

The answer is a no load stock index fund from a mutual fund company that keeps expenses low. In index fund that seeks to match the returns of the S&P 500 stocks, the market average fund managers seek to beat, will help you mirror the return the market gives. Over a long time, average earnings for stocks have been higher than bonds or cash.

As a beginner investing in a stock index fund reduces the transaction costs, expenses, and taxes for the fund. By tracking the rate of return following the overall market, you’ll beat most of the fund managers out there and provide an easy hands free method to investing in stocks.

While a beginning investor should make sure they have paid off high interest debt and created an emergency fund, then it’s appropriate to get a stock index fund up and going as one of your first investments.