Looking to make a return on the market? Learn how to get professionals to manage your money wisely with stock funds.
Investing in stocks is no simple task.
Even for professionals, beating the market is very difficult. Daily technical analysis of the S&P 500 reveals that the index beats most speculators in equity markets.
Every year, many new investment funds are started, and most of them fail. The goal of these funds is to beat the general trend of the stock market, which is risky and difficult. Yet, those successful in this endeavor will make millions or even billions of dollars.
Fortunately, there is a public record for every public investment fund. The track records of the best-performing funds are openly available for anyone to read and research. This means that anyone can find an excellent stock fund to invest in with their own money.
On top of that, you don’t need to be a millionaire to access the very best investment funds on the stock market. In fact, these funds will sell shares, or equity, for relatively affordable prices.
Let’s take a look at how it works.
What Is a Stock Fund?
First, we should understand the basics of stock funds.
A stock fund is a basket of investments that accredited and experienced investors professionally manage. In other words, a fund is just a collection of many different investments that is actively managed by professional investment managers.
So, if you invest in a top-quality stock fund, your money is being managed by the best of the best in the industry. There is no need to worry about picking individual stocks such as preferred stocks or managing a complex portfolio; you can just research and invest in a reliable and well-performing stock fund.
There are many different types of stock funds, and not all of them perform the same.
Some focus on rapid growth with higher risk profiles, while others focus on very steady and reliable growth with low risks. Some focus on providing maximum profit, while others focus on providing a steady income of cash payments for investors. Some funds are even charitable, and you may find them donating stock to a donor-advised fund.
Choosing the right stock fund for you will depend on your investment capital, financial goals, tolerance for risk, and personal preference in the markets.
Why are Stock Funds a Good Way to Invest?
There are many benefits to investing in stock funds. The primary and most obvious benefit is to delegate your investments to a team of financial professionals with a proven track record of success.
In other words, investing in stock funds is a way to put your money into the hands of people who know how to manage investments and grow money reliably. Plus, you can shop around and find the perfect stock fund for your investment goals.
However, there are many other benefits to investing in stock funds.
Diversification
One of the most important rules in successful investing is diversification. This is the concept of spreading your money across several different assets and markets in order to reduce risk. If one of your investments do poorly, the others can make up the difference and keep your money growing.
A stock fund will immediately and expertly diversify your investments by putting your capital into a carefully managed basket of investments that represent the overall fund.
Proven Profitability
Another major benefit of stock funds is the ability to view performance history. Thanks to financial regulations, these funds are required to publish historical records of their assets, performance, and other important metrics for their funds.
You can see exactly how much money the fund made, where they made it, when they made it, and how well your own investment is likely to perform. If the fund has done well over many years, you can trust that it will help you grow your own money.
Professional Standards
There are many legal and professional standards for starting and operating a successful fund.
The fund not only has to meet the minimum legal requirements, but it also has to perform well just to survive. If a fund meets regulatory requirements but does not perform well, it will eventually be shut down and liquidated.
However, if the fund meets all requirements and performs well, you can trust it to manage your money responsibly and effectively. This is a serious challenge, but there’s also high demand. Many people want to invest in successful funds, so successful funds emerge.
Which Funds are Right for Me?
Not all funds are the same, and there are more funds than can be listed in this article.
Let’s review some of the most commonly traded stock funds.
Index Funds
These are the golden standard of stock funds.
An index fund tracks the general state of a stock market, and the most popular type of index funds are those that track the S&P 500. This is an index of 500 large companies on the US stock market. It represents the general health of the stock market and, to an extent, the overall health of the world economy.
This is a very stable investment if you can time the business cycle of the economy. The world economy moves in cycles of expansion, recession, depression, and recovery. The stock market, or the equity market, follows this cycle closely. Here is an illustration of the concept:
This illustration shows how the business cycle moves from positive periods of growth, eventual slowing, reversal of growth, and eventual recovery. While the economy is constantly expanding, it does not grow at a constant rate.
This chart represents the performance of the S&P 500 over the last 50 years. You can see that it moves in a regular cycle of booms and busts. These cycles are a fundamental part of the economy.
These market cycles are also a crucial aspect of index funds. These funds are great investments if the general stock market is moving upwards in a bull market but they can still lose money if it moves downwards in a bear market.
Dividend Funds
These funds tend to focus on stocks or other assets that pay out dividends or regular cash payments to investors. This model is popular with large companies that are not as focused on growth.
Instead of focusing on expanding their company and stock price, they seek to satisfy shareholders with dividend payments. Similar funds collect payments from other sources such as commercial, residential, or government real estate mortgages, and some pay every month.
High Yield Funds
These funds are considered to be high-risk and high-reward investments. They focus on investments that involve explosive growth, specialty markets, or emerging trends.
The best of these will consistently outperform index funds by a wide margin, with some performing over 100%, doubling their investors’ money in a year or less. Mutual funds with defense stocks also yield high returns, with the Fidelity® Select Defense & Aerospace Portfolio (MUTF: FSDAX) yielding 12% on average each year.
However, they are considered much riskier and can lead to larger losses for investors.
Consider an Example
Say you have $6,000 to invest in two stock funds. Buying stock with unsettled funds is an option if you want to invest right away, but you will have to wait until the funds are settled before selling.
Let’s assume that you are choosing to invest at the start of 2020 and want to make some high yet steady returns with a chance of excellent returns. However, you also want to protect your investment and not take ridiculous chances with your money.
You could put 70% or $4,200 into an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO).
That leaves 30% or $1,800 to put into a high-performing fund. For the sake of the example, let’s say you put it into the attractive and environmentally responsible iShares Global Clean Energy ETF (ICLN).
Despite the massive stock market crash, your VOO investment would have recovered and made a healthy 18.40% or $722.80. Meanwhile, your thematic investment into clean energy with ICLN would have returned a whopping 103% or $1,854.
That leaves a total positive return of $2,576.80 or a 42.94% return with a total account balance of $8,576.80. Now, this is a very high return, but not ridiculous for a small account. This number could be much greater with regular contributions from savings or compounded investments.
Now you have an idea of how stock funds work and how you can invest in them. To get started, find a retail broker that fits your needs and start doing some online research on stock funds that you’d like to invest in.
Featured Image: Twenty20
