Princeton Real Estate | A Better Way To Manage Your 401k And Long Term Investments
Every year millions of investors lose out because many of the funds that investment companies offer are not in their best interests financially in the short term or long term. The problem is, for a myriad of reasons, these investment funds that are offered have multiple hidden costs, lower returns and offer less flexibility to the investor. For an unsuspecting investor, this news can come as a shock and yet another way these companies bilk them out of their own money. Using index funds and ETF?s allow investors to get the most for their money and give them the best opportunity to grow their money.
What are Index and ETF Funds?
Index funds are relatively simple to understand, their goal is to mimic the price movements of: a financial market index or a measure of the market. The nice thing about them is that they have a very specific set of rules that spell out what investments the fund will own. That allows the investor to know what an index?s value will be based on and what will be held in the fund continuously regardless of what is happening in the market. Once you understand Index funds, ETF?s become very easy to understand since they are really just a more intricate form of Index?s funds. Like Index?s, ETF?s hold asset classes such as stocks, bonds, currencies, or other more exotic forms of assets.
Quick History of Index Funds and ETF?s.
John Bogle created the first index fund on December 31, 1975. During his college years at Princeton University, some time earlier he came to the conclusion that most mutual funds do not outperform the standard market averages. Initially, the world laughed at his idea of an Index fund for an investor to purchase, they thought it was the worst thing an investor could possibly do. One person in particular who really didn?t like it was Edward Johnson, the then Chairman of Fidelity Investments. He once stated that, ?He could not believe that the great mass of investors are going to be satisfied with receiving just average returns.? Looking back at his quote, you can just laugh, knowing that it is highly unlikely that over the long term any actively managed fund you invest in will consistently and totally beat the general market.
How much money can you save with Index Funds or ETF?s?
There are two primary sources of excess costs that are added to an investor?s yearly bill if they invest in funds that are not index or ETF?s. The first is annual fees for management of the fund. Basically many mutual funds charge investors somewhere between 1.3%-3.5% per year. These fees are how they stay in business and earn a profit. Consider this, the average Index Fund or ETF will charge you anywhere from 0.09%-0.89% per year. Now that seems like a small amount until you realize, most mutual funds are charging on average 1.1%-1.5% more per year just for them to manage your investments. Now lets do a scenario to see how much this will cost us over 10, 20 and 40 years. We will assume that somehow this fund is growing at 7% on average per year. We will invest $10,000 initially and never put a dollar more into this fund. All the growth will come from in the form of appreciation from the investments the fund makes and will only have a 1.35% fee per year for the mutual fund. We will compare this to an Index/ETF fund that also grows at 7% a year and has a.35% per year fee. Below is how it went for our different time periods:
- After 10 years, our $10,000 is now worth $19,672, but wait, you had to fees to pay so, our high priced mutual fund earned us $17,326 and the Index/ETF returned to us $19,037.
- After 20 years, our $10,000 is now worth $38,697, after fees, $30,019 with the mutual fund, $36,242 with the Index/ETF fund.
- After 40 years, our $10,000 is now worth $149,744, after fees, $90,111 with the mutual fund, $131,351 with the Index/ETF fund.
Lets analyze the difference of the two options given to the hypothetical investor above to see how much more the mutual fund costs the investor after each time period. After 10 years the investor paid $1,711 dollars more in fees, in 20 years the investor an additional $6,223 in fees and finally after 40 years the investor paid $41,240 MORE in fees. That money could have been growing and working for the investor, instead the mutual company made a fortune and worst of all for the investor is that typically less than 1% of all mutual funds beat the markets on a regular basis. So you paid more and got less, Wal-Mart would be ashamed if they had to change their slogan to this! The total cost of the index fund for the investor, after 10 years is just $635, 20 years $2,455 and 40 years is $18,393, which is still a lot, but not even close to what the mutual fundwould have taken you for. How could it get any worse than this for the mutual funds investors? Well, if the fund is in a taxable account, it can get very, very bad! The reason being, index funds and ETF?s almost never sell their initial investments and they don?t have to sell stock to let people have their money when they want it from back from the fund. When investors have a mutual fund, the fund is constantly buying and selling assets, creating a taxable income for the investor, plus when someone needs to cash out their money the mutual fund sells more stock to pay them thus creating more taxes for everyone to pay. What is interesting, is that with ETF?s and Index Funds you are only buying shares in the index so you pay taxes when you sell the investment, for the most part. Until then, you don?t pay any taxes; your money just grows and grows for you. Of course if this is a 401k or tax-exempt investment you don?t have to worry the tax costs. The tax liability and fees are just two of the many reasons why you should buy index funds and ETF?s, instead of mutual funds since it will allow you to get the most for your money and give you the best opportunity to grow your money the most you possibly can.
Why Index Funds and ETF?s are better?
Index Funds and ETF are safer for you as an investor because you don?t have to worry about what is called ?style drift? and you have more control of your investments. The term ?style drift basically means that sometimes mutual funds decide to go outside of what they describe to you as their investment style to increase their funds returns. This can be very dangerous, moving some or most of a funds money into a different investment strategy without investors knowing about it could greatly increase their money?s risk if these assets have a bad day with the markets. One perfect example is the once successful Bear Stearns. This genius company had a series of mutual funds that invested in mortgages for their clients. The idea was these mortgages they were buying were 90% prime (very, very excellent credit history) loans and 10% at most were going into sub-prime loans. Well, at some point the fund manager decided, he can increase the funds performance if 40-60% of the money was tied up in risky, sub-prime mortgages and other exotic forms. Everything was fine, this fund outperformed the market until one day these types of loans started to see dramatically higher defaults. The value of these loans to an investor started to plummet. To sum things up, investors lost a lot of money and had no clue they were buying these dangerous assets. So moral of the story, just because they say they are buying a style, doesn?t mean they really are.
Another important thing Index Funds and ETF?s offer an investor is control and flexibility. If you target your money into certain types of investment strategies, you know where your risk is, for example, if you buy a real estate ETF and real estate starts to get very bad, you can sell it and buy something else that isn?t going to lose all your money. You have flexibility to, on the fly change your asset allocation (how your money is divided between your different investments), which can save you a lot of money if things get bad. The risk that your fund is participating in style drift and lack of flexibility are yet another set of reasons why you should buy index funds and ETF?s, instead of mutual funds since it will that enable you to get the most out of your money and give you the best opportunity to grow your investments.
Investing can and is risky for everyone who participates and even for some who don?t. You need to be able to preserve your money from all sorts of threats. Some of those could be fees, maybe increased taxes, style drift or lack of control and even flexibility. To guard you from that, use Index Funds and ETF?s, which will enable you to leap right over many of those problems and get you closer to your investment goals than other alternatives. Vanguard is probably the safest bet for Index and ETF assets if you can use them, because they are a not for profit company so they will always have the stated goal of giving you the best value possible. Other companies may be good as well, but nearly all the others are for profit companies that have shareholders to look after. Investing is like being in a boat in the middle of the ocean, sometimes there is storms and sometimes it is calm but it always requires doing what is best for you and your boat so remember, use Index Funds and ETF?s and you will survive the monsoons and always be on top of the waves!
Long Term Investment Strategies
David Escobar
eskylessons@gmail.com
Visit Esky Lessons
A finance major with extensive mathematics training. An avid reader and researcher in politics, investing and history.
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ByDavid Escobar
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Every year millions of investors lose out because many of the funds that investment companies offer are not in their best interests financially in the short term or long term. The problem is, for a myriad of reasons, these investment funds that are offered have multiple hidden costs, lower returns and offer less flexibility to the investor. For an unsuspecting investor, this news can come as a shock and yet another way these companies bilk them out of their own money. Using index funds and ETF?s allow investors to get the most for their money and give them the best opportunity to grow their money.
What are Index and ETF Funds?
Index funds are relatively simple to understand, their goal is to mimic the price movements of: a financial market index or a measure of the market. The nice thing about them is that they have a very specific set of rules that spell out what investments the fund will own. That allows the investor to know what an index?s value will be based on and what will be held in the fund continuously regardless of what is happening in the market. Once you understand Index funds, ETF?s become very easy to understand since they are really just a more intricate form of Index?s funds. Like Index?s, ETF?s hold asset classes such as stocks, bonds, currencies, or other more exotic forms of assets.
Quick History of Index Funds and ETF?s.
John Bogle created the first index fund on December 31, 1975. During his college years at Princeton University, some time earlier he came to the conclusion that most mutual funds do not outperform the standard market averages. Initially, the world laughed at his idea of an Index fund for an investor to purchase, they thought it was the worst thing an investor could possibly do. One person in particular who really didn?t like it was Edward Johnson, the then Chairman of Fidelity Investments. He once stated that, ?He could not believe that the great mass of investors are going to be satisfied with receiving just average returns.? Looking back at his quote, you can just laugh, knowing that it is highly unlikely that over the long term any actively managed fund you invest in will consistently and totally beat the general market.
How much money can you save with Index Funds or ETF?s?
There are two primary sources of excess costs that are added to an investor?s yearly bill if they invest in funds that are not index or ETF?s. The first is annual fees for management of the fund. Basically many mutual funds charge investors somewhere between 1.3%-3.5% per year. These fees are how they stay in business and earn a profit. Consider this, the average Index Fund or ETF will charge you anywhere from 0.09%-0.89% per year. Now that seems like a small amount until you realize, most mutual funds are charging on average 1.1%-1.5% more per year just for them to manage your investments. Now lets do a scenario to see how much this will cost us over 10, 20 and 40 years. We will assume that somehow this fund is growing at 7% on average per year. We will invest $10,000 initially and never put a dollar more into this fund. All the growth will come from in the form of appreciation from the investments the fund makes and will only have a 1.35% fee per year for the mutual fund. We will compare this to an Index/ETF fund that also grows at 7% a year and has a.35% per year fee. Below is how it went for our different time periods:
- After 10 years, our $10,000 is now worth $19,672, but wait, you had to fees to pay so, our high priced mutual fund earned us $17,326 and the Index/ETF returned to us $19,037.
- After 20 years, our $10,000 is now worth $38,697, after fees, $30,019 with the mutual fund, $36,242 with the Index/ETF fund.
- After 40 years, our $10,000 is now worth $149,744, after fees, $90,111 with the mutual fund, $131,351 with the Index/ETF fund.
Lets analyze the difference of the two options given to the hypothetical investor above to see how much more the mutual fund costs the investor after each time period. After 10 years the investor paid $1,711 dollars more in fees, in 20 years the investor an additional $6,223 in fees and finally after 40 years the investor paid $41,240 MORE in fees. That money could have been growing and working for the investor, instead the mutual company made a fortune and worst of all for the investor is that typically less than 1% of all mutual funds beat the markets on a regular basis. So you paid more and got less, Wal-Mart would be ashamed if they had to change their slogan to this! The total cost of the index fund for the investor, after 10 years is just $635, 20 years $2,455 and 40 years is $18,393, which is still a lot, but not even close to what the mutual fundwould have taken you for. How could it get any worse than this for the mutual funds investors? Well, if the fund is in a taxable account, it can get very, very bad! The reason being, index funds and ETF?s almost never sell their initial investments and they don?t have to sell stock to let people have their money when they want it from back from the fund. When investors have a mutual fund, the fund is constantly buying and selling assets, creating a taxable income for the investor, plus when someone needs to cash out their money the mutual fund sells more stock to pay them thus creating more taxes for everyone to pay. What is interesting, is that with ETF?s and Index Funds you are only buying shares in the index so you pay taxes when you sell the investment, for the most part. Until then, you don?t pay any taxes; your money just grows and grows for you. Of course if this is a 401k or tax-exempt investment you don?t have to worry the tax costs. The tax liability and fees are just two of the many reasons why you should buy index funds and ETF?s, instead of mutual funds since it will allow you to get the most for your money and give you the best opportunity to grow your money the most you possibly can.
Why Index Funds and ETF?s are better?
Index Funds and ETF are safer for you as an investor because you don?t have to worry about what is called ?style drift? and you have more control of your investments. The term ?style drift basically means that sometimes mutual funds decide to go outside of what they describe to you as their investment style to increase their funds returns. This can be very dangerous, moving some or most of a funds money into a different investment strategy without investors knowing about it could greatly increase their money?s risk if these assets have a bad day with the markets. One perfect example is the once successful Bear Stearns. This genius company had a series of mutual funds that invested in mortgages for their clients. The idea was these mortgages they were buying were 90% prime (very, very excellent credit history) loans and 10% at most were going into sub-prime loans. Well, at some point the fund manager decided, he can increase the funds performance if 40-60% of the money was tied up in risky, sub-prime mortgages and other exotic forms. Everything was fine, this fund outperformed the market until one day these types of loans started to see dramatically higher defaults. The value of these loans to an investor started to plummet. To sum things up, investors lost a lot of money and had no clue they were buying these dangerous assets. So moral of the story, just because they say they are buying a style, doesn?t mean they really are.
Another important thing Index Funds and ETF?s offer an investor is control and flexibility. If you target your money into certain types of investment strategies, you know where your risk is, for example, if you buy a real estate ETF and real estate starts to get very bad, you can sell it and buy something else that isn?t going to lose all your money. You have flexibility to, on the fly change your asset allocation (how your money is divided between your different investments), which can save you a lot of money if things get bad. The risk that your fund is participating in style drift and lack of flexibility are yet another set of reasons why you should buy index funds and ETF?s, instead of mutual funds since it will that enable you to get the most out of your money and give you the best opportunity to grow your investments.
Investing can and is risky for everyone who participates and even for some who don?t. You need to be able to preserve your money from all sorts of threats. Some of those could be fees, maybe increased taxes, style drift or lack of control and even flexibility. To guard you from that, use Index Funds and ETF?s, which will enable you to leap right over many of those problems and get you closer to your investment goals than other alternatives. Vanguard is probably the safest bet for Index and ETF assets if you can use them, because they are a not for profit company so they will always have the stated goal of giving you the best value possible. Other companies may be good as well, but nearly all the others are for profit companies that have shareholders to look after. Investing is like being in a boat in the middle of the ocean, sometimes there is storms and sometimes it is calm but it always requires doing what is best for you and your boat so remember, use Index Funds and ETF?s and you will survive the monsoons and always be on top of the waves!
Long Term Investment Strategies
David Escobar
eskylessons@gmail.com
Visit Esky Lessons
A finance major with extensive mathematics training. An avid reader and researcher in politics, investing and history.
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Princeton Real Estate | A Better Way To Manage Your 401k And Long Term Investments
Every year millions of investors lose out because many of the funds that investment companies offer are not in their best interests financially in the short term or long term. The problem is, for a myriad of reasons, these investment funds that are offered have multiple hidden costs, lower returns and offer less flexibility to the investor. For an unsuspecting investor, this news can come as a shock and yet another way these companies bilk them out of their own money. Using index funds and ETF?s allow investors to get the most for their money and give them the best opportunity to grow their money.
What are Index and ETF Funds?
Index funds are relatively simple to understand, their goal is to mimic the price movements of: a financial market index or a measure of the market. The nice thing about them is that they have a very specific set of rules that spell out what investments the fund will own. That allows the investor to know what an index?s value will be based on and what will be held in the fund continuously regardless of what is happening in the market. Once you understand Index funds, ETF?s become very easy to understand since they are really just a more intricate form of Index?s funds. Like Index?s, ETF?s hold asset classes such as stocks, bonds, currencies, or other more exotic forms of assets.
Quick History of Index Funds and ETF?s.
John Bogle created the first index fund on December 31, 1975. During his college years at Princeton University, some time earlier he came to the conclusion that most mutual funds do not outperform the standard market averages. Initially, the world laughed at his idea of an Index fund for an investor to purchase, they thought it was the worst thing an investor could possibly do. One person in particular who really didn?t like it was Edward Johnson, the then Chairman of Fidelity Investments. He once stated that, ?He could not believe that the great mass of investors are going to be satisfied with receiving just average returns.? Looking back at his quote, you can just laugh, knowing that it is highly unlikely that over the long term any actively managed fund you invest in will consistently and totally beat the general market.
How much money can you save with Index Funds or ETF?s?
There are two primary sources of excess costs that are added to an investor?s yearly bill if they invest in funds that are not index or ETF?s. The first is annual fees for management of the fund. Basically many mutual funds charge investors somewhere between 1.3%-3.5% per year. These fees are how they stay in business and earn a profit. Consider this, the average Index Fund or ETF will charge you anywhere from 0.09%-0.89% per year. Now that seems like a small amount until you realize, most mutual funds are charging on average 1.1%-1.5% more per year just for them to manage your investments. Now lets do a scenario to see how much this will cost us over 10, 20 and 40 years. We will assume that somehow this fund is growing at 7% on average per year. We will invest $10,000 initially and never put a dollar more into this fund. All the growth will come from in the form of appreciation from the investments the fund makes and will only have a 1.35% fee per year for the mutual fund. We will compare this to an Index/ETF fund that also grows at 7% a year and has a.35% per year fee. Below is how it went for our different time periods:
- After 10 years, our $10,000 is now worth $19,672, but wait, you had to fees to pay so, our high priced mutual fund earned us $17,326 and the Index/ETF returned to us $19,037.
- After 20 years, our $10,000 is now worth $38,697, after fees, $30,019 with the mutual fund, $36,242 with the Index/ETF fund.
- After 40 years, our $10,000 is now worth $149,744, after fees, $90,111 with the mutual fund, $131,351 with the Index/ETF fund.
Lets analyze the difference of the two options given to the hypothetical investor above to see how much more the mutual fund costs the investor after each time period. After 10 years the investor paid $1,711 dollars more in fees, in 20 years the investor an additional $6,223 in fees and finally after 40 years the investor paid $41,240 MORE in fees. That money could have been growing and working for the investor, instead the mutual company made a fortune and worst of all for the investor is that typically less than 1% of all mutual funds beat the markets on a regular basis. So you paid more and got less, Wal-Mart would be ashamed if they had to change their slogan to this! The total cost of the index fund for the investor, after 10 years is just $635, 20 years $2,455 and 40 years is $18,393, which is still a lot, but not even close to what the mutual fundwould have taken you for. How could it get any worse than this for the mutual funds investors? Well, if the fund is in a taxable account, it can get very, very bad! The reason being, index funds and ETF?s almost never sell their initial investments and they don?t have to sell stock to let people have their money when they want it from back from the fund. When investors have a mutual fund, the fund is constantly buying and selling assets, creating a taxable income for the investor, plus when someone needs to cash out their money the mutual fund sells more stock to pay them thus creating more taxes for everyone to pay. What is interesting, is that with ETF?s and Index Funds you are only buying shares in the index so you pay taxes when you sell the investment, for the most part. Until then, you don?t pay any taxes; your money just grows and grows for you. Of course if this is a 401k or tax-exempt investment you don?t have to worry the tax costs. The tax liability and fees are just two of the many reasons why you should buy index funds and ETF?s, instead of mutual funds since it will allow you to get the most for your money and give you the best opportunity to grow your money the most you possibly can.
Why Index Funds and ETF?s are better?
Index Funds and ETF are safer for you as an investor because you don?t have to worry about what is called ?style drift? and you have more control of your investments. The term ?style drift basically means that sometimes mutual funds decide to go outside of what they describe to you as their investment style to increase their funds returns. This can be very dangerous, moving some or most of a funds money into a different investment strategy without investors knowing about it could greatly increase their money?s risk if these assets have a bad day with the markets. One perfect example is the once successful Bear Stearns. This genius company had a series of mutual funds that invested in mortgages for their clients. The idea was these mortgages they were buying were 90% prime (very, very excellent credit history) loans and 10% at most were going into sub-prime loans. Well, at some point the fund manager decided, he can increase the funds performance if 40-60% of the money was tied up in risky, sub-prime mortgages and other exotic forms. Everything was fine, this fund outperformed the market until one day these types of loans started to see dramatically higher defaults. The value of these loans to an investor started to plummet. To sum things up, investors lost a lot of money and had no clue they were buying these dangerous assets. So moral of the story, just because they say they are buying a style, doesn?t mean they really are.
Another important thing Index Funds and ETF?s offer an investor is control and flexibility. If you target your money into certain types of investment strategies, you know where your risk is, for example, if you buy a real estate ETF and real estate starts to get very bad, you can sell it and buy something else that isn?t going to lose all your money. You have flexibility to, on the fly change your asset allocation (how your money is divided between your different investments), which can save you a lot of money if things get bad. The risk that your fund is participating in style drift and lack of flexibility are yet another set of reasons why you should buy index funds and ETF?s, instead of mutual funds since it will that enable you to get the most out of your money and give you the best opportunity to grow your investments.
Investing can and is risky for everyone who participates and even for some who don?t. You need to be able to preserve your money from all sorts of threats. Some of those could be fees, maybe increased taxes, style drift or lack of control and even flexibility. To guard you from that, use Index Funds and ETF?s, which will enable you to leap right over many of those problems and get you closer to your investment goals than other alternatives. Vanguard is probably the safest bet for Index and ETF assets if you can use them, because they are a not for profit company so they will always have the stated goal of giving you the best value possible. Other companies may be good as well, but nearly all the others are for profit companies that have shareholders to look after. Investing is like being in a boat in the middle of the ocean, sometimes there is storms and sometimes it is calm but it always requires doing what is best for you and your boat so remember, use Index Funds and ETF?s and you will survive the monsoons and always be on top of the waves!
Long Term Investment Strategies
David Escobar
eskylessons@gmail.com
Visit Esky Lessons
A finance major with extensive mathematics training. An avid reader and researcher in politics, investing and history.
Article Source:
Did you find this article helpful?00
About the Author:
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ByDavid Escobar
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Every year millions of investors lose out because many of the funds that investment companies offer are not in their best interests financially in the short term or long term. The problem is, for a myriad of reasons, these investment funds that are offered have multiple hidden costs, lower returns and offer less flexibility to the investor. For an unsuspecting investor, this news can come as a shock and yet another way these companies bilk them out of their own money. Using index funds and ETF?s allow investors to get the most for their money and give them the best opportunity to grow their money.
What are Index and ETF Funds?
Index funds are relatively simple to understand, their goal is to mimic the price movements of: a financial market index or a measure of the market. The nice thing about them is that they have a very specific set of rules that spell out what investments the fund will own. That allows the investor to know what an index?s value will be based on and what will be held in the fund continuously regardless of what is happening in the market. Once you understand Index funds, ETF?s become very easy to understand since they are really just a more intricate form of Index?s funds. Like Index?s, ETF?s hold asset classes such as stocks, bonds, currencies, or other more exotic forms of assets.
Quick History of Index Funds and ETF?s.
John Bogle created the first index fund on December 31, 1975. During his college years at Princeton University, some time earlier he came to the conclusion that most mutual funds do not outperform the standard market averages. Initially, the world laughed at his idea of an Index fund for an investor to purchase, they thought it was the worst thing an investor could possibly do. One person in particular who really didn?t like it was Edward Johnson, the then Chairman of Fidelity Investments. He once stated that, ?He could not believe that the great mass of investors are going to be satisfied with receiving just average returns.? Looking back at his quote, you can just laugh, knowing that it is highly unlikely that over the long term any actively managed fund you invest in will consistently and totally beat the general market.
How much money can you save with Index Funds or ETF?s?
There are two primary sources of excess costs that are added to an investor?s yearly bill if they invest in funds that are not index or ETF?s. The first is annual fees for management of the fund. Basically many mutual funds charge investors somewhere between 1.3%-3.5% per year. These fees are how they stay in business and earn a profit. Consider this, the average Index Fund or ETF will charge you anywhere from 0.09%-0.89% per year. Now that seems like a small amount until you realize, most mutual funds are charging on average 1.1%-1.5% more per year just for them to manage your investments. Now lets do a scenario to see how much this will cost us over 10, 20 and 40 years. We will assume that somehow this fund is growing at 7% on average per year. We will invest $10,000 initially and never put a dollar more into this fund. All the growth will come from in the form of appreciation from the investments the fund makes and will only have a 1.35% fee per year for the mutual fund. We will compare this to an Index/ETF fund that also grows at 7% a year and has a.35% per year fee. Below is how it went for our different time periods:
- After 10 years, our $10,000 is now worth $19,672, but wait, you had to fees to pay so, our high priced mutual fund earned us $17,326 and the Index/ETF returned to us $19,037.
- After 20 years, our $10,000 is now worth $38,697, after fees, $30,019 with the mutual fund, $36,242 with the Index/ETF fund.
- After 40 years, our $10,000 is now worth $149,744, after fees, $90,111 with the mutual fund, $131,351 with the Index/ETF fund.
Lets analyze the difference of the two options given to the hypothetical investor above to see how much more the mutual fund costs the investor after each time period. After 10 years the investor paid $1,711 dollars more in fees, in 20 years the investor an additional $6,223 in fees and finally after 40 years the investor paid $41,240 MORE in fees. That money could have been growing and working for the investor, instead the mutual company made a fortune and worst of all for the investor is that typically less than 1% of all mutual funds beat the markets on a regular basis. So you paid more and got less, Wal-Mart would be ashamed if they had to change their slogan to this! The total cost of the index fund for the investor, after 10 years is just $635, 20 years $2,455 and 40 years is $18,393, which is still a lot, but not even close to what the mutual fundwould have taken you for. How could it get any worse than this for the mutual funds investors? Well, if the fund is in a taxable account, it can get very, very bad! The reason being, index funds and ETF?s almost never sell their initial investments and they don?t have to sell stock to let people have their money when they want it from back from the fund. When investors have a mutual fund, the fund is constantly buying and selling assets, creating a taxable income for the investor, plus when someone needs to cash out their money the mutual fund sells more stock to pay them thus creating more taxes for everyone to pay. What is interesting, is that with ETF?s and Index Funds you are only buying shares in the index so you pay taxes when you sell the investment, for the most part. Until then, you don?t pay any taxes; your money just grows and grows for you. Of course if this is a 401k or tax-exempt investment you don?t have to worry the tax costs. The tax liability and fees are just two of the many reasons why you should buy index funds and ETF?s, instead of mutual funds since it will allow you to get the most for your money and give you the best opportunity to grow your money the most you possibly can.
Why Index Funds and ETF?s are better?
Index Funds and ETF are safer for you as an investor because you don?t have to worry about what is called ?style drift? and you have more control of your investments. The term ?style drift basically means that sometimes mutual funds decide to go outside of what they describe to you as their investment style to increase their funds returns. This can be very dangerous, moving some or most of a funds money into a different investment strategy without investors knowing about it could greatly increase their money?s risk if these assets have a bad day with the markets. One perfect example is the once successful Bear Stearns. This genius company had a series of mutual funds that invested in mortgages for their clients. The idea was these mortgages they were buying were 90% prime (very, very excellent credit history) loans and 10% at most were going into sub-prime loans. Well, at some point the fund manager decided, he can increase the funds performance if 40-60% of the money was tied up in risky, sub-prime mortgages and other exotic forms. Everything was fine, this fund outperformed the market until one day these types of loans started to see dramatically higher defaults. The value of these loans to an investor started to plummet. To sum things up, investors lost a lot of money and had no clue they were buying these dangerous assets. So moral of the story, just because they say they are buying a style, doesn?t mean they really are.
Another important thing Index Funds and ETF?s offer an investor is control and flexibility. If you target your money into certain types of investment strategies, you know where your risk is, for example, if you buy a real estate ETF and real estate starts to get very bad, you can sell it and buy something else that isn?t going to lose all your money. You have flexibility to, on the fly change your asset allocation (how your money is divided between your different investments), which can save you a lot of money if things get bad. The risk that your fund is participating in style drift and lack of flexibility are yet another set of reasons why you should buy index funds and ETF?s, instead of mutual funds since it will that enable you to get the most out of your money and give you the best opportunity to grow your investments.
Investing can and is risky for everyone who participates and even for some who don?t. You need to be able to preserve your money from all sorts of threats. Some of those could be fees, maybe increased taxes, style drift or lack of control and even flexibility. To guard you from that, use Index Funds and ETF?s, which will enable you to leap right over many of those problems and get you closer to your investment goals than other alternatives. Vanguard is probably the safest bet for Index and ETF assets if you can use them, because they are a not for profit company so they will always have the stated goal of giving you the best value possible. Other companies may be good as well, but nearly all the others are for profit companies that have shareholders to look after. Investing is like being in a boat in the middle of the ocean, sometimes there is storms and sometimes it is calm but it always requires doing what is best for you and your boat so remember, use Index Funds and ETF?s and you will survive the monsoons and always be on top of the waves!
Long Term Investment Strategies
David Escobar
eskylessons@gmail.com
Visit Esky Lessons
A finance major with extensive mathematics training. An avid reader and researcher in politics, investing and history.
Article Source:http://EzineArticles.com/?expert=David_Escobar
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Escobar, David?A Better Way to Manage Your 401k and Long Term Investments.?A Better Way to Manage Your 401k and Long Term Investments.17 Jul. 2010EzineArticles.com.18 Sep. 2011 http://ezinearticles.com/?A-?Better-?Way-?to-?Manage-?Your-?401k-?and-?Long-?Term-?Investments&id=4687973>.
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