With so many different types of stocks, bonds and other investments (like funds) out there, how is a not-so-investment-savvy female supposed to invest some hard-earned money that may yield a positive return without getting duped into the wrong thing? For starters, you can try your best to learn some of the basic terminology. Second, if you have decided to go with a financial advisor, be honest with her/him and let them know that you’re a newbie at this. Lastly, if anyone tries to make you feel stupid, remember- no one can make you feel inferior without your consent- and you’re in charge here, not them- it’s your money- there are thousands of honest advisors out there who won’t make you feel like an idiot, so you don’t need this one.
With this in mind, two very popular means of investing are Mutual Funds and Index Funds. They are both funds that are considered a “Collective Investment”, which means that a group of people with some cash to invest get together, pool their money into one fund- each owning a share of this fund, varied upon the amount of their investment. Instead of each owner picking and choosing from stocks and bonds, one “fund manager” does all the work for them- for a fee, of course. This manager puts the money into “areas” of the markets, like “Small Businesses Funds”, “International Business Funds”, etc. Both types can lose money.
Okay- so far both types of funds are “collective investments” with a bunch of people putting money into one common “fund” that’s based on how a particular group of investments turn out and that’s about all these two investments have in common.
Mutual Funds deal with a more targeted group of stocks, bonds and securities in which the fund manager trades the “make-up” or “underlying” securities and takes the capital gains or loss respectively, and collects the dividend (if any). The proceeds are then passed on to the individual investors. Mutual funds can have high fees as they are “actively managed” (meaning that a real-live person is doing all of the work).
Index Funds are collective investments that are based upon the movement of a specific financial market, like the S&P 500 Index Fund (Standard & Poor’s list of top stock performers). The majority of Index Funds rely on a computer instead of a human for managing the fund (passive management), so the fees are much less (a computer doesn’t have a family to support).
History tells us the only times that a Mutual Fund has outperformed an Index fund is when the U.S. economy is either going into or coming out of a recession. All in all, Index Funds have out-performed Mutual funds from a broad point of view, so they are generally much safer, especially for those who don’t know the ins and outs of the market that well, or don’t have a trustworthy financial advisor who’s just looking for some big commissions and doesn’t care about your money.
