If you have any significant amount of money that you know you won’t need to spend for a few years, you likely want to invest that money so that it works for you to increase in value while you don’t need it. You also know, however, than investments are risky — you could win big and make money with very little work, or you could lose your initial investment just as easily. Investing can be extremely complicated, and most of us don’t have the time or the inclination to study the market and carefully manage an investment. Luckily, you don’t have to. Here is a basic breakdown of the three main choices when it comes to investing your money without managing your own stocks.
Although not typically viewed as an investment, a good savings account meets all the criteria. When you don’t need to spend your money right away, you can put it in an account and essentially lend it to the bank in exchange for a higher profit margin. Over time, you will turn a modest profit. Savings accounts tend to be some of the lowest yielding investments, but they are extremely safe. You do not stand to lose your initial investment, and you can also access your money and make withdrawals at any time and with little to no notice. The balance does not, however, increase to match inflation.
If you don’t need the advantage of liquidity and won’t need to withdraw your money for some time, you can opt for a Certificate of Deposit, which offers the same safety along with higher profit margins in exchange for restricted access to your money for a set period of time.
If you want a higher return on your investment and to keep pace with inflation, you must also accept the higher level of risk that comes with buying stocks, or shares in ownership of a company. Linking your financial future to the market value of one or several specific companies is the most volatile option, and may result in both great gain and great loss.
You can, however, invest in stocks for a more modest return and much less risk with an Index Fund. And Index Fund spreads your investment out across the entire market by buying a representative sample of stocks. This means that if any one company does poorly, your own investment will not go down with it. Your returns will be tied to the overall health of the market, which almost always increases over long enough periods of time.
Actively Managed Mutual Funds
Actively managed Mutual Funds are Index Funds that are carefully curated and overseen by an expert who actively chooses which stocks make up your fund at any given time and makes trades according to their best predictions of the market. The goal is to outperform the market, resulting in higher gains for their investors. Of course, there can be no guarantee that these goals will be met, and even the experts are sometimes wrong, resulting in higher losses. Because the funds are actively managed, they also charge larger fees.