Mutual and index funds: a dry but useful read

It’s almost fall break and the marvelous free time that is associated with it. Although sleeping for 62 hours straight isn’t a bad idea, spending a bit of that time investing for the first time - or revising your portfolio if you already have one - is an even better plan. The only question is what to invest in.

Everybody knows about stocks. They can be risky, they can make you rich, if you get enough you can hold a not-very-hostile take over, they often pay dividends, etc.

Mutual funds are much like stocks. You buy shares of them, and resell them for a profit, with luck. The difference is, with stocks you are betting on the performance of a specific company. With mutual funds, you are betting on the performance of a specific investor (or investing company). With a mutual fund you will have a portfolio that is much more diversified; instead of investing $1000 with 1 or 2 companies, that money will be invested in hundreds or thousands of different stocks and bonds and other investing platforms that real people don’t worry about. The catch? A load. In exchange for actively managing the fund, the manager takes a percentage of your earnings, and this is called a load. Some funds have rather low loads, but even that can seriously eat up earnings.

Want an easy, well diversified portfolio with a significantly lighter load? Try an index fund. You’ve certainly heard of a few. The NASDAQ, the Dow Jones, and the S&P 500 are all index funds. Instead of being actively traded by a manager, these funds follow the general trend of selected stocks. Some funds are very well diversified, with investments across many industries and in multiple companies. Some index funds focus on a specific industry. This way, you can invest your money in fields such as technology, without all of your dreams riding on a specific company. With both index and mutual funds, it’s possible to find one that fits your goals. Some are targeted for growth, others for stability. Some only invest in companies that share certain values, such as sustainability or vegetarianism.

There’s plenty more to learn about investing. So pick up a book, search the web, talk with a financial advisor, or just dive right in!