Before we jump into ETFs and index funds, I wanted to first highlight why investing is important. Investing is important when it comes to securing your financial future and reaching your financial goals. It ensures your money is constantly working for you to generate additional, passive income so that you have more time to do the things you love. So, how does the money you invest in the stock market work for you? Stock and real estate investments can lead to returns through dividends and/or from capital gains. Dividends are a sum of money paid regularly to you by a company out of its profits. Capital gains are the profits earned on the sale of an asset that has increased in value over time. Try to invest a percentage of your income each month (I recommend at least 15%-20%) so that you can maximize those gains. Set monthly and annual goals to avoid deviating from your investing plan.
As we all know, there are tons of stocks to choose from when investing in the stock market. It can be a little overwhelming and difficult to know what to buy. I want to go over some of the safest investments you can make as you begin your investing journey. Here are 2 types of funds you can invest in that are critical for your stock portfolio.
ETFs, or exchange traded funds, are a type of security that involves a collection of securities that often tracks an index. In simple terms, I like to refer to ETFs as “a bucket of stocks”. ETFs can include hundreds and even thousands of stocks across multiple industries like the technology industry, retail, industrial, and more. ETFs make it possible for you to maintain a diversified stock portfolio with minimal investment amounts and low expense ratios. The most popular ETFs follow the S&P 500 index, the NASDAQ-100 index, the Russell 1000 index, or large technology companies. Some of the most popular ETFs include VTI, QQQ, ARKK, VOO, VXUS, SPY, IVV, and many more. You can simply buy ETFs like you would if you were buying a single share of stock. I include a healthy amount of ETFs in my stock portfolio and reinvest all dividends paid out to me. This is a sure way to grow your stock portfolio quickly.
Although ETFs are awesome assets to include in your stock portfolio, there are a few disadvantages to ETFs. ETFs generally have lower dividend yields due to the lower risks associated with owning ETFs. You will not see high dividends like you would get from higher yielding stocks. Another disadvantage of ETFs are that they could cost more when compared to investing in a specific stock. Often times, there are management fees associated with ETFs contributing to their higher costs.
Index funds, in my opinion, are a must have in your stock portfolio. Even the legendary Warren Buffet has recommended index funds to include in your savings because they benefit you as you get older. Index funds include stocks and bonds that are designed to reflect the performance of the financial market index. What does that mean exactly? This means that by mimicking the stock market, the fund will match its performance. Index funds usually follow the S&P 500 and are passive which is great for those of you who are looking for a less hands on approach to your investment strategy. Index funds are also low cost, have strong long term returns, and offers diversification for your stock portfolio. Some popular index funds are FNILX, SWPPX, FXAIX, VINIX, VFIAX, SWTSX, VBTLX, and tons more. I also have index funds in my stock portfolio with FXAIX and FNILX being my personal favorites.
There are a few disadvantages associated with index funds tat you should be aware of before buying. Since index funds mimic the financial market index, they are vulnerable to market crashes. Also, index funds experience limited gains and are not actively managed. This means that there is minimal buying and selling activity. You should expect to hold an index fund long term in order to outperform the market.
Take the Leap
Investing for the first time can be a little confusing and may make you nervous but it is one of the easiest ways to grow your money over time without much effort. Investing in ETFs and index funds is great for beginners due to their lower costs and low risks associated, however even the most experienced investors include these assets in their stock portfolios. You can purchase ETFs and index funds in any brokerage account and review information about them before purchasing. It is also okay to seek advice on which ETFs and index funds are the best, but always conduct your own research before making an investment. Now, go for it!