Mutual Funds, Exchange Traded Funds And Your Financial Freedom
As a newbie investor just learning the ropes, there is a very good chance that you should concentrate on mutual funds for the bulk of your investments.
Mutual funds and their close cousin, exchange traded funds or ETF's, are a basket of securities which enables you to make one purchase in a particular fund.
This can give you instant diversification and sometimes asset allocation.
There are over 10,000 different mutual funds and exchange traded funds.
Some hold all stocks, some hold all bonds, some funds hold a mix of both stocks and bonds and some are very specific in what securities they hold in their portfolio.
Maybe they don't have any stocks of companies that are involved in alcohol, firearms or tobacco as one example, or maybe they are concentrated on precious metals or some other commodity.
Something else to consider when deciding upon your diversification, just as different asset classes perform differently over time, foreign securities also perform differently versus American securities...
the point is that you need to have some foreign exposure in your portfolio.
You will see many financial articles dealing with the fact that China and India are the two fastest growing economies today.
You should be able to capture some of that growth with your selections which in turn will secure your financial freedom.
For many investors, mutual funds are the only type of security that they ever purchase and that is O.
K.
Stocks tend to have big swings each day so if you were to own individual stocks, you would probably see big changes both up and down in the value of your portfolio.
On the other hand, holding mutual funds tends to smooth out the bumps on the investment highway.
Furthermore, most companies that offer a retirement plan in the way of a 401(k) plan or a 403(b) plan, only offer mutual funds from which you have a choice to pick from after your account is funded.
By the way, the name 401(k) or 403(b) is named as such because it references the section in the I.
R.
S.
Code book that allows for these tax deferred savings vehicles that everyone should take advantage of if they truly want to achieve financial freedom.
The benefit of a tax deferred is so that you can put some of your earnings into one of these plans BEFORE tax is computed on your pay.
You then pay taxes on the remainder which since it is a smaller number, it means you pay less taxes.
Your contribution therefore grows tax deferred until you retire and start to take a distribution from the account.
At that point you are taxed on your distribution at your tax rate when you retire which for most people is a lower tax rate than when they are working so the end result is that you will end up paying less taxes which is a good way to reach financial freedom.
Here are some more pointers on mutual funds as this is where the majority of U.
S.
Household money is invested.
As stated earlier, there are thousands of funds spread across many different categories.
We talked about stock funds and bond funds etc.
Now that you understand risk and reward, keep the following in mind: Mutual Funds and Exchange Traded Funds that reach for greater returns are termed aggressive growth funds and those that strive for safety are termed conservative growth funds.
Funds that have bond holdings and dividend stocks are termed income funds.
A mixture of the above would be termed a growth & income fund.
When you are just starting to invest, you will want to have some exposure to more aggressive funds.
Since your time horizon until you need to withdraw money is much greater at this point, you can afford to take on more risk.
As you get closer to retirement, your focus should turn towards less aggressive and more income funds.
This style of thinking is in line with historical principles for ensuring your financial freedom.
A final word on Exchange Traded Funds a.
k.
a.
ETF's.
These are a relatively new type of security that one can invest in.
They are made up of a basket of stocks and or bonds just like mutual funds.
They differ in that they can be traded all day long just like a stock.
Mutual funds can only be traded at the end of the trading day when the fund manager calculates the Net Asset Value (NAV) of the fund.
This determines the share price and hence what you will pay for that fund.
Traditionally, ETF's mainly mirrored indexes like the S&P 500 or the Precious Metals index, but now the rules have been relaxed and there are hundreds of different exchange traded funds which allow the investor to tailor what ETF they purchase according to their risk tolerance.
ETF's are becoming increasingly popular as an investment vehicle because of their low purchase price, tax efficiency and stock like features.
Your financial freedom will come down to prudent investing with asset allocation in mind and time on your side...
so start early and never give up!
Mutual funds and their close cousin, exchange traded funds or ETF's, are a basket of securities which enables you to make one purchase in a particular fund.
This can give you instant diversification and sometimes asset allocation.
There are over 10,000 different mutual funds and exchange traded funds.
Some hold all stocks, some hold all bonds, some funds hold a mix of both stocks and bonds and some are very specific in what securities they hold in their portfolio.
Maybe they don't have any stocks of companies that are involved in alcohol, firearms or tobacco as one example, or maybe they are concentrated on precious metals or some other commodity.
Something else to consider when deciding upon your diversification, just as different asset classes perform differently over time, foreign securities also perform differently versus American securities...
the point is that you need to have some foreign exposure in your portfolio.
You will see many financial articles dealing with the fact that China and India are the two fastest growing economies today.
You should be able to capture some of that growth with your selections which in turn will secure your financial freedom.
For many investors, mutual funds are the only type of security that they ever purchase and that is O.
K.
Stocks tend to have big swings each day so if you were to own individual stocks, you would probably see big changes both up and down in the value of your portfolio.
On the other hand, holding mutual funds tends to smooth out the bumps on the investment highway.
Furthermore, most companies that offer a retirement plan in the way of a 401(k) plan or a 403(b) plan, only offer mutual funds from which you have a choice to pick from after your account is funded.
By the way, the name 401(k) or 403(b) is named as such because it references the section in the I.
R.
S.
Code book that allows for these tax deferred savings vehicles that everyone should take advantage of if they truly want to achieve financial freedom.
The benefit of a tax deferred is so that you can put some of your earnings into one of these plans BEFORE tax is computed on your pay.
You then pay taxes on the remainder which since it is a smaller number, it means you pay less taxes.
Your contribution therefore grows tax deferred until you retire and start to take a distribution from the account.
At that point you are taxed on your distribution at your tax rate when you retire which for most people is a lower tax rate than when they are working so the end result is that you will end up paying less taxes which is a good way to reach financial freedom.
Here are some more pointers on mutual funds as this is where the majority of U.
S.
Household money is invested.
As stated earlier, there are thousands of funds spread across many different categories.
We talked about stock funds and bond funds etc.
Now that you understand risk and reward, keep the following in mind: Mutual Funds and Exchange Traded Funds that reach for greater returns are termed aggressive growth funds and those that strive for safety are termed conservative growth funds.
Funds that have bond holdings and dividend stocks are termed income funds.
A mixture of the above would be termed a growth & income fund.
When you are just starting to invest, you will want to have some exposure to more aggressive funds.
Since your time horizon until you need to withdraw money is much greater at this point, you can afford to take on more risk.
As you get closer to retirement, your focus should turn towards less aggressive and more income funds.
This style of thinking is in line with historical principles for ensuring your financial freedom.
A final word on Exchange Traded Funds a.
k.
a.
ETF's.
These are a relatively new type of security that one can invest in.
They are made up of a basket of stocks and or bonds just like mutual funds.
They differ in that they can be traded all day long just like a stock.
Mutual funds can only be traded at the end of the trading day when the fund manager calculates the Net Asset Value (NAV) of the fund.
This determines the share price and hence what you will pay for that fund.
Traditionally, ETF's mainly mirrored indexes like the S&P 500 or the Precious Metals index, but now the rules have been relaxed and there are hundreds of different exchange traded funds which allow the investor to tailor what ETF they purchase according to their risk tolerance.
ETF's are becoming increasingly popular as an investment vehicle because of their low purchase price, tax efficiency and stock like features.
Your financial freedom will come down to prudent investing with asset allocation in mind and time on your side...
so start early and never give up!