Stock Market Investment Strategy

Investing in stocks doesn’t have to just for the market savvy. Anyone with a self directed IRA, or even just funds to open an investment account can invest in the stock market. Don’t know anything about stocks you say? Well, there is a solution for those that either don’t have the time or inclination to do lots of study. Index funds or ETFs are the vehicles of choice for these types of investors.


What is an index fund? An index fund is sort of like a mutual fund. A mutual fund is made up of a group of stocks that are selected for certain reasons. This reason could be stock value, past performance, by sector, or even by the philosophies of the companies , such as a green fund - based on a company’s environmental impact. These mutual funds have a fund manager who takes a percentage of the funds earnings, as well as earning commissions based on trades within the fund. If the manager doesn’t do a good job, they still get paid the commissions, while you lose the value.

An index fund, on the other hand, is a group of stocks that make up an entire index, such as the S&P 500 index. This particular index fund includes all of the stocks in the S&P 500, regardless of any particular stocks performance. These indices are normally compiled by computer, so this eliminates the need for a fund manager, therefore reducing expenses. The idea behind the index is that it will give you stable growth. The stock market over time has risen - generally 5-7% per year, with some flux. A mutual fund manager is always trying to pick stocks that beat the market average, and taking on inherent risk in doing so. Buying an index fund basically will give you average market returns each year - with no chance of beating the market average, but not under performing, either. So, purchasing shares in an index fund will involve only the investor deciding which index to purchase. You can open an investment account with a company such as Vanguard and purchase their index fund. Most index funds require a certain amount to open, and a specific amount reinvested each month.