Where to Start Investing in Stocks?
Investing in stocks is a great way to build long-term wealth. However, people are often hesitant to get started because they are overwhelmed by all the decisions they need to make. So, if you are just getting starting, I recommend investing your money in an index fund.
What are Index Funds?
Index Funds like the S&P 500 Exchange Traded Fund (ETF) or Vanguard’s various funds are considered passive investments. This funds simply attempt to follow the market index they are modeled after. Since you can’t invest directly in the S&P 500 Index (the actual S&P 500 Index only tracks a group of stocks, it isn’t a stock itself), the ETF is a great option. Index Funds own the same stocks that the underlying Index tracks, so they have nearly the exact same returns. And with the S&P 500 averaging 9.8 percent over the last 90 years, simply matching the market can provide solid gains.
Lower Fees
Since Index Funds just match the underlying Index, they don’t need expensive money managers. In Active Funds, these managers are consistently researching new investments trying to outperform the market. All this research and management is costly, which is why Active Funds have much higher fees. According to a Morningstar study from 2015, the average fees on Active Funds was 0.61%, while Index Funds averaged less than 0.25%. Although this may not seem like a big difference, these fees can add up over time due to compounding returns.
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So, when you’re ready to start investing in stocks, begin with a low-cost Index Fund. Active Funds or trying to pick individual stocks requires a lot more of your time and money.
Q&A Series
This post is part of a series of articles in which I answer common questions I’ve been asked. If you have a question leave a comment below or contact me directly.
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