Imagine yourself standing in front of a beast ready to devour you, and you have nothing to protect yourself against this beast. That beast is the stock market, which can benefit you, but only if you know what to do with that beast. Knowing how to invest in the stock market is the key to keeping your money protected. Investing in the stock market can be confusing and overwhelming to where you don't want to put your money into the stock market. However, there are many ways to make money from the stock market. In this blog, we will be discussing the differences between exchange-traded funds (ETFs), index fund, and mutual fund.

How do individual stocks play in ETF, Index fund, and Mutual Fund?

Before we dive into the differences between ETF, Index fund, and Mutual fund, we need to understand how individual stocks intertwine with those funds. When a company goes public, people can buy a share of the company, essentially like a part-owner of the company but without doing all the work. There are various reasons why stock prices go up and down. The main reason relates to supply and demand. Supply refers to investors who want to sell the stock, while demand refers to investors willing to buy the stock. Check out this website for more information that explains different factors that impact stock prices.

What are Index Funds?

Index funds were pioneered by John Bogel back in 1975 as a way for amateur investors to compete against the pros. Imagine buying a basket of many individual stocks when purchasing an index fund. Different broker firms design various index funds that mimic the performance and the composition of a financial market index. However, it does not have an active manager that manages the index fund. The most popular index fund is the S&P 500 index fund, composed of the top 500 companies in the stock market. An index fund is designed for passive investment, and the market's theory will always rise. Historically, the market has been growing on average 8% every year.

Of course, you would ask whether this costs me any money. The index funds come with a meager percentage cost. The extra cost is passed down to the investors through the fund's expense ratio. As a result, the index funds often cost less than a percent ranging from 0.2 % to .05% or cheaper. The typical percentage for an actively managed fund is from 1% to 2.5%. So let's translate that into a numbers scenario:

Let's say you bought $10,000 worth of the Schwab S&P 500 Index fund. The cost of owning the index fund is .02% which is 2 dollars a year. If it was an actively managed fund, and let's say it costs 1%, which is 100 dollars a year. With that, you can see a considerable difference in cost between the index fund and an actively managed fund. I don't know about you, but I rather keep that extra 98 dollars in my fund.

The only downside of the index fund is that the fund can only be traded at the set price point at the end of the trading day. The main reason is to allow the individual companies within the fund to reflect their stock prices at the end of the day. Thus, leading us to exchange-traded funds.

What are Exchanged Traded Fund (ETFs)?

Exchanged traded funds (ETF) are built like index funds that allow investors to buy a basket of different company stocks. It has the same low-cost fees that are similar to index funds. The only difference is that ETFs can be bought and sold during the trading day. It allows a day trader could make money from ETFs based on the tiny fluctuations throughout the day. However, this is more of a long-term strategy.

What are Mutual Funds?

This next section is essential information to remember. If you have one thing to take away from this blog post is this next section. Now you know three other purchases you can invest into the stock market. A mutual fund is essentially a basket of stocks of different companies, just like an index fund or ETF. However, mutual funds are actively managed by a fund manager with the hopes of beating the stock market.

Here is breaking news, 96% of the active mutual funds failed to beat the market. Your guess is just as good as the fund manager. So why the hell do you want them to do all the guessing knowing that you have a 96% chance of either losing money or not beating the market?

Here's another statistic to realize; 49% of the fund managers owned no shares in the mutual funds they manage. So does that mean those fund managers don't trust their mutual funds and yet, pass them off to their clients?

Here's another drawback for a mutual fund, their hefty fees. The average cost of owning a mutual fund is 3.17%. Even though that number seems small, it does impact your returns drastically. For example, average inflation cost goes up annually 7%, and let's say your mutual funds grow 8% (that being conservative). So the fund manager takes their share of 3.17% out of that 8%, leaving you with 4.83% and behind the inflation cost.

Review: EFT vs. Index Fund vs. Mutual Fund

• Individual stocks: buying direct stocks individually from companies. 

• Index Funds: Low-cost basket of stocks within a sector, market, or industry. 

• ETF: Same as Index Funds but can be bought and sold on the same trading day. 

• Mutual Fund: High-cost basket of stocks managed by a manager that guess just as good as you can.

Final Thoughts

At the end of the day, I'm not here to tell you what to do with your money. You do whatever you want to do with your money. The point of this blog post is to share information with you to make great investment decisions. From where I stand, I would avoid mutual funds at all costs possible and focus on an investment strategy that involves ETFs, Index fund, and individual stocks.

If you just want to park your money and forget about it, you are much better off investing in index funds or ETFs. Theoretically and historically, the stock market has gone up on average 10% or more annually.

If you want to learn more information on investment strategies, check out the books below:

"Unshakable" by Tony Robbins

"Money master of the game: 7 steps to financial freedom." by Tony Robbins.

So if you ever love money, take control of your financial future.

Until next time.

DJ Everton-Lovell

Check this out if you want to learn how to make money online.