3 Ways to Go About Making Your First Investment - CashNetUSA.com

If you?re not in a position to have an employer make investments in a 401(k) on your behalf, you may not have ever invested in anything before, other than stashing some money in a bank savings account now and then. With interest rates where they are, those funds are losing money to inflation, so that?s more of a preservation of cash rather than an actual investment.

Here we?ll talk about three different ways to get started, which could be especially helpful for young adults who may not have employer options just yet:

• Mutual Funds ? Mutual funds are typically a basket of many stocks that a fund manager buys so that the risk of the fund failing as a whole is quite low. The way the valuation works is that there?s a ?Net Asset Value,? which is the mix of all the returns of the various stocks held in the fund that gets set at market close each day. The reality is that most of the time, there are so many stocks held in a mutual fund that the total return pretty much tracks major market indices like the Dow Jones industrial average. That begs the question of whether you should invest in ?actively managed? funds or ?passive index? funds. Actively managed funds use a fund manager to try and pick the best stocks and beat the index, while passive index funds just invest in whatever the established stock market index is, meaning there is no discretion over which stocks to pick. What the data show is that most active managers can?t beat the index, yet have higher expenses in their funds, so most investors are probably better off using index mutual funds.

• Individual Stock Investing ? Many individual investors prefer to buy stock in companies they know and are passionate about. For instance, when the iPhone was becoming popular, many investors were rewarded with great returns by investing in Apple stock. Unfortunately, of late, the very same stock that did so well in past years has crumbled, so it just shows that hot stocks can fall quickly. Many investors try individual stock picking at some point in their lives and then switch to lower cost index investing, realizing they can?t do any better than professional money managers, who often can?t beat the market anyway.

• ETFs ? Exchange Traded Funds are a good diversion from individual stock investing and mutual funds. ETFs trade just like stocks in real-time on stock exchanges, but they are comprised of many stocks or commodities all in the same basket. But unlike mutual funds, which can only be bought and sold once per day based on the daily close of all their holdings, ETFs can be traded during the day. They also have many different ?themes? or categories. So there are ETFs for company spinoffs, the price of gasoline, and even solar companies. Investors that believe a particular investment trend or theme will be big in the future can invest in a themed ETF with a regular online trading account just like stocks, but they have the added benefit of diversification across multiple companies within the ETF.

There?s no single correct approach to determining the investments you should hold, but I?m of the opinion that initial investors should focus on keeping the costs low and avoiding too much risk with an individual stock, which would favor either mutual funds or ETFs.

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The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

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