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The Trader's Edge

Technical Analysis

Trading School: Individual funds

If you have the money available, you can start investing straight away in good quality individual ETFs and then in index funds in mutual funds. An index fund is a fund that tracks a broad market index or basket of stocks, bonds, and other investments (learn more here). (See the summary of a mutual fund to understand how they work.)

Individual funds are suitable for early-stage retirement investors, because they may have more space in their investments and they don’t pay a management fee (since your contributions are managed by the fund, and you pay you through regular brokerage fees). And the tax-free early distributions of the ETFs allow you to put off the decision of when to sell your portfolio. However, if you don’t have time, you should consider whether a more conservative ETF (such as a simply managed equity fund) or a more diversified portfolio will provide better value.

The bottom line is that investing in a specific stock or basket of stocks at any given time is no guarantee that it will perform better than other stocks at that time. When you decide which stock or basket you’ll buy, you should be aware of potential long-term risk, including that of a particular stock or basket falling in value or another company outperforming the stock or basket. And at any point in time, if a particular company has a bad quarter, then you may get into trouble if you lose money. (Not a good reason to buy stocks, right?)

Use good management.

Good managers are some of the best hedge-fund or mutual fund investors you can find. A management fee is the sum of the compensation of the fund’s head of investment, other employees and outside advisors. By reducing the costs of investing, management fees reduce the risk that you could lose money when you invest. Of course, your investment should be diversified, so that the percentage ownership of each stock or basket is based on the average ownership of all stocks and baskets in the market, not just the best individual company.

Work with a bank.

Typically, when people buy a stock or ETF for the first time, they are quite confident that they can beat the stock’s performance or that the stock will rise in value. But sometimes even well-informed investors can get it wrong, and they should work with a qualified professional, who can monitor the stock for its value and then deliver a good price on that value when the time comes.

This is especially important for things like bonds, which may have long maturities and not yet yielded any money.

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