Confuse about ETF, mutual funds..

[Aaron414]

I'm hoping that someone can help me out on this.
The whole idea of mutual funds, ETF is to buy and hold correct and to let it grow? that's what i've been told anyway. Let's say I have $100 worth of ETF in my account, tomorrow it'll go up to $102 and the day after that it goes back to $99, When exactly does your money start to grow? the more money you put in it? does it grow slowly over time while fluctuating up and down? How is my earning being calculated? at the end of the month? sorry i'm just a little confuse by the whole idea. With stocks and forex, I can understand but I know you don't buy and sell regularly with mutual funds like that right?

[GREENBACK]

Your money will grow as you accumulate shares of the stocks your funds are invested in. You're buying shares at a certain value today in hopes that they will be more valuable down the road. You continue to buy shares of these funds and if they go up in value as they likely will if they're good funds you'll see your money grow: More shares at a higher valuation= more wealth.

[Aaron414]

so your earning is the difference of the future price and the price you're at right now right? It's called Divident right? do they automatically take that and put it back into your account to go towards more shares? do they do it everyday? every month?

[Broken Arrow]

When it all comes down to it, the basic premise is that the stock market will, over the course of decades, climb higher.

Short term (say, within 5 years) and even mid-term (say, within 15 years), the market can easily fluctuate up and down.

To be fair, not everyone agrees that the stock market will always go up over the long term. But that's also why diversification is so important. Most people should not have 100% stock equities.

Your portfolio should also include some % of other asset classes, such as bonds (or maybe even income stocks) that would generate dividends. Dividend is just interest they pay for buying their investments. It's how they attract investor money, especially if the growth potential of the investment is limited. But they also tend to be fairly stable.

Dividend pay is anywhere from monthly to quarterly to annually. It depends, but such an information should be publicly available.

Finally, I would NOT lump Forex with the likes of normal investing. In fact, I wouldn't even lump it in the same ball park as active or day trading. That's because, the assumption here is that the trading is based on an honest system where market makers provide some level of transparency and is somehow enforced by government regulation and oversight.

Let me make this crystal clear: Forex is NOT government regulated. Some market makers will actually bet AGAINST their own clients' bids! Worse yet, some are just fly-by-night scams with flashy websites that just takes your money one day, and next day, poof! Some have lost tens of thousands this way.

To be fair, there is such a thing as "legitimate Forex". I believe they call it something along the lines of "Direct Access Platform Trading" and are typically members of the National Futures Association. But even then, Forex is extraordinarily risky. Most grossly underestimate the level of due diligence required to make any kind of informed trades. This is, quite arguably, one of the best ways to gamble your money away short of going to a casino.

Seriously, there are more entertaining ways to lose money than Forex.

[disneysteve]

I'd suggest you go to the library or bookstore and pick up a couple of basic investing books. I know the Wall Street Journal has a good one that defines all the terms and stuff. I'm not positive but there is probably also an Investing for Dummies book that I'm sure would be good. There are also plenty of websites that have basic info.

Perhaps others can suggest specific titles.

[GREENBACK]

The questions you ask depend on the type of funds you're in and how you choose to manage them. dividends are the earnings you make from investments and you can reinvest it or take the profit. Mutual fund investor's are typically long term investors and reinvest their profits.

Fund managers will take your money and invest it in the best buying opportunities as they come along. This is where you want to be sure you're buying the best funds. You don't want your cash going to bad stuff or sitting around as cash in someone else's hands.

As a mutual fund investor Your goal should be to accumulate shares of good funds that over time become more valuable.

To answer the question; yes, you buy shares on a regular basis and position yourself in the best funds you can and look toward them growing in value. Not really rocket science and there are others here who know far more than me about this stuff.

[Aaron414]

If all i'm doing is ETF funds, how many do you recommend having at one time? like 2 or 3?

[disneysteve]

If all i'm doing is ETF funds, how many do you recommend having at one time? like 2 or 3?

It all depends on your asset allocation. You may have 2 or 3 or 8 or 10. It depends how much you want to diversify. You could have a large cap, a small cap, a value fund, an international fund, a REIT, a couple of sector funds (technology, precious metals), etc.

Keep in mind that with ETFs you do generally pay a fee each time you buy and sell shares so ETFs aren't so good for dollar cost averaging (although I think Schwab now has a deal with no-commission ETFs). If you are going to be investing small amounts over time, mutual funds can be the better way to go.

[Aaron414]

I see, does more diverse means that it's less risky? higher potential returns?

[GREENBACK]

I see, does more diverse means that it's less risky? higher potential returns?

In a nut shell, yes. Diversity among your funds will allow you to absorb some of the hits that the market, inevitably, will deliver. You won't necessarily see higher returns in the short term but by deversifying you take away the potential for cartastrophic losses in a short period.

Remember, this is a long term strategy. This isn't "Day Trading" where you looking for a big score overnight.

By the way, there is nothing magical about ETF's. They are mutual funds with slightly different rules as was previously stated. I personally don't own them and see no reason to.

[disneysteve]

Keep in mind that diversifying properly involves spreading your investments among different assets classes, not just different funds. Buying 4 different large cap stock funds is not diversifying. Buying one large cap, one small cap, one international and one bond fund is.

[Scanner]

Well, if you want to get real technical. . .if you own 1 mutual fund or 1 ETF, you are instantly diversified in that you own 20-2000 companies.

For the sake of argument, let's say you own either SPY (an ETF) or the Vanguard S & P 500. You would own a piece of 500 companies (equally split I beleive).

Where you wouldn't be diversified is you would be entirely exposed to one sector (is the term) - Large Cap stocks - big companies, like Coke, Walmart, Catepillar, Bank of America, etc. And they tend to have a certain performance one year or the next.

To get "portfolio diversity", you want to own different sectors - real estate, bonds, precious metals, commodities, small caps, mid caps, international. . .they all perform differently and insulate you from loss (but mediate gain also).

To me, there is such a thing as being overdiversified but that's a seperate topic.

That's the 2 ways "diversity" are used in investing.

So, if you own 1 share of SPY, you are actually somewhat diversified. Compared to owning one share of Walmart, you are not diversified. All of your money is riding on how Walmart is managed, if people will buy there, if healthcare does them in, all the trial and tribulations of owning a business.

A ETF or a mutual fund is a way to be an owner in several different businesses at once.

[Aaron414]

I see. so in a way, the more shares you own, the more ownership you have over that company, in returns the more money you get?

[disneysteve]

I see. so in a way, the more shares you own, the more ownership you have over that company, in returns the more money you get?

The first part of your statement is right - The more shares you own, the larger your stake in the company.

The second part about the larger returns depends, of course, on how the stock/fund performs. More shares could mean bigger gains if they do well but it could also mean bigger losses if they do poorly.