Where exactly should a new investor put their money into?
Interestingly, a study came out stating that it’s a mixed bag where the average millionaire has their net worth. Roughly 40% if their worth is in real estate vs index funds & stocks. That certainly leaves a dilemma for the beginner and average investor.
So, which is the better for you as an investor? Index funds, stocks, or real estate? Here’s a review of each as well as pros and cons.
Index Funds Review
If the stock market does well, you will make money with an index fund. You don’t have to choose which stocks will succeed.
The S&P 500, the Dow, and Nasdaq are all examples of indexes.
Index funds are typically managed without human intervention, meaning they are automatically assembled. Index funds are different from mutual funds because they are not actively managed by people who try to do better than the market.
Although an actively managed fund may not necessarily be successful, the majority of funds do not perform well when fees are considered.
Pros Of Index Funds
Funds that are not actively managed tend to outperform those that are over time. Active funds require a lot of effort and management from humans, which can make them more expensive. This does not always result in better returns.
Index funds can provide investors with a way to earn money through steady and consistent growth over time. By investing in an index fund, which is a fund that owns a bunch of different stocks, you can protect yourself from losing a lot of money if any one particular stock does poorly. If a portfolio only has one or two accounts, they will eventually be removed from the index, resulting in a only temporary loss for the fund.
IFs are a great option for long-term portfolios because they are consistent and slowly produce large gains over time.
Index funds have much lower fees than non-index funds. Index funds do not require a portfolio manager and therefore have a lower expense ratio. The industry average is usually about 1% The cheaper the expense ratio is, the better. The average expense ratio in the industry is usually 1%.
Cons Of Index Funds
An disadvantage of investing in index funds is that they typically require more money to get started than individual stocks. If you have a limited budget, Vanguard Dividend Growth Fund (VDIGX) might not be an option for you because it has a minimum investment of $3,000.
You should shop around to find the best index funds that fall within your budget. If you’re looking for somewhere to invest your money, Vanguard and Blackrock are two good options.
Potentially High Fees
You should be careful with index funds that have very high expense ratios, for example 1.5% or more. High fees for an index fund are unnecessary. When you spend money on someone else, it is not contributing to your wealth.
Although index funds have the potential to provide a higher return than traditional investing methods, they also come with additional fees like annual charges and exit fees. These fees occur when you trade or liquidate your funds. It is important that you read a fund’s prospectus before purchasing it so that you fully understand what you are agreeing to.
Index funds are more rigid than managed funds because they follow strategies to stay compatible with different indexes.
This can become an issue for a declining index. If the value of a fund falls, managers usually wait until it improves again rather than selling it immediately. A rebound almost always happens, but it may take some time for it to happen.
Don’t expect to get rich overnight with index funds. Even if you invest in a high-growth index fund, your money will not be concentrated in a single company. If one of the companies in the index increases in value by a large amount, the success will be diluted because it is only a small part of the fund.
Real Estate Investing Review
Other than the land that it occupies, a key component of real estate is the buildings or structures that are found on it. These buildings can be used for housing, commercial purposes, or a variety of other activities.
Investing in real estate can help increase your overall wealth. There is some risk involved in any investment, but you can reduce this risk by being informed and making smart decisions.
Pros Of Investing In Real Estate
There are many benefits to investing in real estate, including the ability to diversify your investment portfolio. However, if all you have is your home, then you’re not diversified. ” As Robert Kiyosaki, author of Rich Dad Poor Dad, once said: “Your house is not an asset.” Rather it is a liability.”
Getting income from a rental property, REIT, or crowdfunded investment portfolio can happen without much work on your part.
There are some great tax advantages that come with investing in real estate.
For instance, you can offset some costs associated with owning a rental property, like property taxes, insurance premiums, mortgage insurance, advertising expenses, and repairs. This could result in a lower taxable income, leading to a lower tax bill when tax season arrives.
Cons Of Investing In Real Estate
Real estate investing can carry some heavy risks for investors, such as:
- Vacancy: There’s no guarantee that a rental property is going to bring in renters, especially during down seasons. This can make it difficult to meet monthly mortgage payments.
- Damages: Investment properties are susceptible to risks like fires, floods, natural disasters, and irresponsible tenants.
- Bad investments: There is also the chance that a real estate investment can go belly-up, especially when investing in a low-demand real estate market area.
If you don’t invest in a managed REIT or crowdfunded investment, or pay a property management company, you’ll have to put a lot of time and effort into managing your property and tenants. It can be very stressful and time-consuming to have to constantly worry about your appearance, making it hard for people with busy schedules.
Before getting into the real estate business, think about your time commitments and resources. You should decide how much money and time you want to invest before you start.
If you have more than one mortgage, it can cause a lot of financial stress, especially if you use your home as collateral.
There are other expenses to consider in addition to monthly mortgage payments. Typically, you will need to put down a 20% or more downpayment on an investment property. There are a few other expenses to be aware of when purchasing a home such as closing costs, monthly maintenance, property taxes and insurance.
The case for investing in stocks Investing in stocks is the most common way for people to start investing. You can learn it quickly and it is convenient, and the learning curve is not high.
Individual Stock Investing Review
I would suggest investing in individual stocks after you have a strong understanding of the markets and how stocks operate.
When you invest in only a few individual stocks, you are not diversifying your investment, and therefore your risk is increased. If you target a specific audience, you can receive a higher reward.
You need a strategy and good understanding of investing to achieve this. I always recommend a value investing strategy if you want to begin investing in individual stocks.
Index funds and Exchange Traded Funds (ETFs)
An ETF is a pool of assets, such as stocks, bonds, or commodities, that trades on an exchange like a stock. ETFs are popular because they offer the potential for high returns, provide diversification, and are often more tax efficient than other types of investments. An ETF is a fund that tracks an index, commodity, or a basket of assets, and you can purchase it like you would an individual stock.
An ETF that includes Google, Amazon, and Facebook would give you exposure to all three companies.
Index funds are similar to mutual funds, but they are structured differently and often require a minimum investment amount.
A mutual fund is usually managed by a person or group of people. The fund managers make the decisions about what stocks the fund holds and how much of each they want to invest in.
The advantages and disadvantages of this are obvious, but some people would rather have a human being in charge of their finances than a computer algorithm.
Pros to Investing in Stocks
There are some clear advantages to investing money in stocks and shares. Otherwise, nobody would be doing it. Here are some of the most considerable advantages of investing in stocks:
Easy to Buy and Sell
The ease of buying and selling stocks is one of the most significant benefits of investing in stocks.
If you want to purchase shares, you can sign up for a brokerage account and deposit money. The same goes for selling. If you want to sell some of the stocks in your portfolio, just place an order to do so.
Historically Large Gains
Over the past nearly 100 years, the average return on investment on stocks has been around 10 percent. Over time, that’s a pretty good return on investments. In fact, here’s what CNN Money says:
” Over time, stocks have shown to produce greater gains than any other type of investment. Over the past ninety years, stocks have averaged a ten percent return annually. Additionally, they didn’t experience a decrease in growth for any period that was 20 years or longer. Stocks are more appealing for long-term savings than treasury bonds or cash because they have higher average annual gains.
Although past performance is not a guarantee of future success, diversifying your portfolio can help you achieve your financial goals. You will also continue to earn more than inflation, which is about three percent per year on average.
If you’re value investor, you know that buying stocks that pay dividends is key.
Most companies choose to reinvest their earnings back into the business, however some will pay a portion of their earnings to shareholders as a dividend. A dividend is a distribution of a company’s profits to its shareholders. If you have stock in a company that pays a dividend, you will receive a portion of the company’s profits.
With stocks, it’s easy to diversify your investment portfolio. This is particularly true if you invest in things like index funds or Exchange Traded Funds, which give you immediate diversification by investing in a number of companies and/or industries.
It is smart to have a diverse range of assets in your investment portfolio. A primary reason companies offer 401(k) accounts with diversified funds is that it is more liquid than owning part of the company’s real estate.
Cons of Investing in Stocks
Investing in stocks comes with risks, too. Here are some of them you should be aware of:
In other words, their prices go up and down a lot. Unless you’re a good stock trader, the prices of stocks go up and down a lot. This means that the value of the currency can go up or down very quickly after you purchase it.
This is how the stock market works, but it is not a get-rich-quick scheme. The majority of successful investors have a buy-and-hold strategy and don’t plan on selling their investments any time soon. I suggesting that you take the same precautions I am because of the dangers involved.
You Can Lose Your Entire Investment
See Enron. You may not lose everything if you invest in stocks, but you could still lose a significant amount.
If you invest in a company, and that company goes bankrupt, your investment will also fail. You may be compensated by the company if it goes bankrupt, but this is not always the case.
The Enron scandal made investors more wary of companies’ financial reports. New rules and regulations were put in place to prevent similar incidents from happening again.
If you don’t know what you are doing, having tools and resources available won’t help. Research the ins and outs of the stock market and thoroughly investigate any companies you’re thinking of investing in before making any decisions.
Individual Stocks Are a Pain to Analyze
I generally recommend that most investors purchase index funds. There are three reasons why investing in multiple properties is a good idea: it’s easier, it provides more diversity, and it helps to reduce risk. However, if you would rather invest in individual stocks, then more power to you.
Although good stock analysis can be beneficial, it requires a significant amount of time and knowledge to be effective. Even though I have two finance degrees, I feel like I’ve only scratched the surface when it comes to complex analysis.
Don’t just trust a magazine or blog on stocks to pick. Talk to a financial advisor or make sure you know exactly what you’re doing before investing.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.