So you saved some money, and now you would like to start investing in the financial markets. Great idea! But what is the best way to invest? How about following some hot stock tip, or investing in this ‘very promising’ startup company? Or how about ‘flipping’ some houses? No, these are not safe bets… these are actually sure ways to lose your money.
So what is the best way to invest?
Well, if you think of investing, you should think about a mid to long term time horizon, say, five to ten years. You should be able to keep your money invested for at least five to ten years. If you need to cash your investments sooner, then it’s probably best not to invest in the stock market. Just keep your money in a bank’s savings account, in a Certificate of Deposit, in a US government bond, or in a similar financial instrument.
Investing for the long term
History shows that the best way to invest for the long term is to invest in the stock market and stick with it. But how do you do that? Most modern investors, including many professional investors, invest their money in a mix of mutual funds and ETFs (Exchange Traded Funds). So let’s start with some background on investing. If you are familiar with the background, you can skip to the Best Investment Strategy below.
BACKGROUND ON INVESTING
What are mutual funds and ETFs?
Mutual funds and ETFs are large baskets of stocks or bonds that are assembled by investment companies. By buying shares in a mutual fund or in an ETF, you buy a small portion of this basket of stocks.
Mutual funds and ETFs are very similar, except for the way they are traded: Mutual funds trade only once every day (at the end of each trading session), whereas ETFs can be traded any time during the trading session.
Kinds of Mutual Funds:
In broad terms, there are two types of mutual funds:
- Managed mutual funds
- Index mutual funds
In a managed mutual fund, the fund manager is a ‘stock picker’ or a ‘bond picker’, selecting stocks or bonds in which fund invests, using his or her stock picking skills. The fund manager selects stocks or bonds based on an estimate of their potential to appreciate in value.
Before investing in a managed mutual fund, check for how long the current manager has managed the fund. The fund manager plays an important role in a managed fund. With a new manager, you cannot draw any conclusions about the fund from its history. Avoid managed mutual funds whose current manager has been there for less than three years.