101: Losing your Stock Market Virginity (Ep.1)
Getting Started!
Life today can be fast paced and consuming, leaving many people with little time and energy to pick investments individually. If one finds themselves unable to allocate a degree of time towards researching and stock picking, then taking on a passive approach may be best.
Passive Investing
Luckily today we live in a time where even the laziest of investors can expect to see a return on their investments by investing in exchange traded funds (ETFs), mutual funds and bonds.
ETFs in short are a basket of investments that are usually designed to track underlying indices, such as, the S&P 500. If a person adopts the ‘lazy’ approach to investing, then they can expect to see returns similar to that of the stock market, which tend to be in the range of 6–8% annualy. However, not all ETFs try replicate the same returns as the market, in fact, we can classify them as actively managed ETFs.
Unlike EFTs that track underlying indices to equal the market returns, actively managed ETFs actually try to beat the market return, with management actively picking investments to maximise profits. In addition to this, ETFs of this nature could also be Industry specific, for example ACES and ARKG. If a person decides to invest in an actively managed ETF, then it is vitally important that the investor takes the time to research the management behind the investment fund.
Investors with little time at their disposal also tend to lean more towards Bonds. Bonds are used by both public and private institutions to raise finance to take on projects. Investors can subscribe to these bonds and receive a return on their investments either based on a variable or fixed rate of interest. The risk entailed with bonds generally stands to be low especially if the bonds are Government issued.
As of today, the bond market has reached unworthy investment returns. In fact, the returns are below 1% in many countries at the moment, but as stated, we won’t be looking into these just yet.
Lastly, investors also have the option to invest in a mutual fund. Just as a brief overview, a mutual fund is similar to an active ETF in scope. When buying one share of a mutual fund, you are buying 1 share of a basket of stocks that are managed by a professional asset management company. They try to beat the market average return, and take a fee.
The Active investor
An active investor in contrast is a person who takes the time to manage their own investments in an attempt to beat the average market return by stock picking. If you are interested on taking an active approach to investing, then a lot of things need to be considered, which we will be covering in later chapters of this series, so stay tuned.
Lastly, regardless if you are an active or passive investor, we recommend that you avoid, over-trading, timing the market and panic-selling. If you’re unsure of what we mean exactly, then make sure out our previous article on Risk and Reward.
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Disclaimer:
Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.
