If you’re ready to start investing, you may be wondering where to start. Stocks, mutual funds, ETFs, Cryptocurrency, Gold/Silver, Bonds, etc. – where do we even begin! There is so much information and misinformation on the internet, so let’s take a look at a few key readiness indicators first.
How do I know if I’m ready to start investing?
If you’ve never invested before, it can be scary to venture into the unknown. After all, there is so much information! But never fear, I’ll do my best to decode. However, before you begin investing, there are a few key things you want to have in place first.
- An emergency fund.
- A budget.
- No commercial debt or debt above 10% (car payments, credit card debt, personal loans, etc.)
If you’ve got these three things safely in place, you’re ready to start investing! If not, start by putting $2,500 in a savings account (for emergencies ONLY) and work hard to pay off all debt! Budgets are key to successful adult life. Some people think budgets stifle fun, but I have found so much freedom and fun in living within our means! If you’ve got these three down, let’s move on to the next section. If not, maybe read some of the other linked articles to help you get on track in these three areas!
When and where should I invest my money?
There are so many different ways to invest. Some people like CDs and bonds, a guaranteed rate of return. Others waste years of their life with money in their “Savings accounts” making a measly 0.01% interest. It’s maddening! Stocks, Gold/silver, and cryptocurrency I’m sure all have their place, but for now, I’m going to focus on the two front runners: Mutual Funds vs. ETFs.
Mutual Funds
Mutual Funds have been around since 1924, believe it or not. The first index mutual fund was launched by Vanguard though, in 1976. Mutual funds are loved by investors as a safer alternative to stock trading. Mutual funds can be actively managed, which results in higher management fees, or passively managed, resulting in lower expenses. While the stock market can be quite volatile, index funds and mutual funds are seen as a safer alternative, as they don’t place all of their eggs in one basket. Even Warren Buffet recommends most investors stick to low-cost, no-frills investments like an S&P 500 index fund.
ETFs
ETFs, or exchange-traded funds, didn’t begin until 1990, (1993 in the U.S.). Their strengths are liquidity, diversity, and being low-cost vehicles for investment. ETFs can track very similar indexes and funds to mutual funds, but there are a few main differences.
Differences
- First, ETFs can be traded intraday, whereas mutual fund transactions can only happen once per day, at the end of the day.
- Typically ETFs have lower fees associated as well. Although at Vanguard, my go-to ETF and Mutual Fund are 0.01% different in expenses (and both very low still!).
- Next, ETFs typically provide more flexibility. For instance, using Vanguard, I can set a limit order to execute when a price falls below a certain threshold. This means my order executes and the ETF is bought when the price is whatever I set it to. However, this order type is not possible with mutual funds. One must check daily to see if they want to buy a mutual fund.
- Also, if you enjoy the set it and forget it mentality for budgeting or investing, you’ll have to invest in mutual funds. ETFs cannot support automatic investments or withdrawals.
- The final difference to point out is that mutual funds at places like Vanguard typically have a minimum initial investment of around $3,000. You can buy just 1 share of an ETF.
Similarities
Other than the stated differences, these can be very similar options. For instance, I own both VOO and VFIAX in my portfolio. As you can see in the pictures below, the holdings and sectors in these two funds are identical. One difference between these two, is that the ETF has an expense ratio of 0.03% and the mutual fund has an expense ratio of 0.04%. Again, those are both extremely low and there’s no wrong choice here!
Final Conclusions
There is no wrong choice. If you’re ready to start investing, I recommend finding a low cost ETF or mutual fund that tracks the S&P 500 or total market and holding it for the long-term. There are pros and cons to each, which means I hold some of each in my portfolio. That being said, there are some differences. Hopefully this article helped highlight some of the main differences and similarities between them.
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