Buy a index? Sure! Why not?

Index funds have become increasingly popular among mutual fund investors because of the draw of low cost expenses. When you buy a Fund, it will usually, if not always tell you what the expense ratio of the fund. Expense ration is very important because of the fact is shows you how much money is deducted from your returns from the fund. Usually at the end of the year(annually) they will take out a certain percentage for administrative fees(trading cost within the fund, analysis of stock picks, time put in from the fund manager etc.)

Index funds track entire indexes. Dow jones industrials(the DOW), S&P 500, Russell 3000, and etc. What makes the expense ratio so low on these types of funds is that the fund buys the WHOLE index, so there is little-to-no human component to it to drive up administrative cost. Most index funds are managed by computer, so there is no trading going on within the fund. All that’s going on is buy and hold the WHOLE index. By taking this approach, you have diversification among stocks, low administrative cost, and you reap the rewards of that particular index doing well.

The dark side of buying an index through a mutual fund is that if the index tanks(during recession or crisis) the fund usually tanks dramatically with little to no cushion to soften the blow.  That’s pretty much the low down on a index.

Common uses for index funds?

1. Provide high Growth to principal over time

2. Hedge your bets against other indexes that aren’t performing really well lately

3. Offset higher expenses from other funds

4 Simply to diversify your portfolio

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Mutual Funds! Description and Purpose

Most people have heard of mutual funds. Mutual Funds are the least complicated way to invest if you are a newcomer to the market, or you don’t have time to buy, diversify, and trade stocks consistently within your portfolio. The easiest way to explain mutual funds are to think of them as a basket, a basket of fruit. Say for instance you have a basket, and you buy nothing but apples and put them in a basket. Think of the apples as stock(shares of a company); If you put nothing but apples in your basket(mutual fund) then it is either called a:

1. Stock Fund-A mutual fund that collects nothing but stocks

2. Bond Fund-A mutual fund that collects nothing but bonds(securities from the government)

Say for instance you put in your basket(mutual fund) Apples(stock) and Oranges(bonds), that would be called an Balanced Fund:

3. Balanced Fund-A mutual fund that collects both stocks and bonds

These are the most commonly bought mutual funds. The reason why they are the most popular among investors is because they are easy to buy, and they usually don’t require much capital(money) for you to invest in them. Now lets look at the most common OBJECTIVES of these funds. Mutual funds have objectives(simply a investing style set forth by the fund manager) that each fund tries to meet. Just like everything in life, every mutual fund has a purpose, an goal that it wants to achieve for its investors(you). Here is a quick run down on the different objectives the most common mutual funds have:

1. Growth Fund-simply wants to provide growth(the increase of the principal you put in the fund when you bought it) for the investor(you).

2. Income Fund- wants to provide income for its investors. Most funds that are income funds are loaded up on bonds, and stocks that pay high dividends. The most common income funds are bond funds.

3. Dividend Fund- dividend funds are most likely stock funds that have nothing but high dividend paying stock in them to pay its investors. If buying for income, the yield of the fund(its fund yield) is the most important part to look at. P.S will talk more in depth about that later…..

These are the most common objectives for the funds you can buy. Here is another list that provides the most common uses for the funds in a portfolio.

1.Stock funds- |Risk=medium/High| Reward=High|

For growth of capital. In laymen s terms, most people buy this type of fund so it can grow their money to keep pace or to exceed the cost of inflation(rise of the price of goods and services over time)

2.Bond Funds-|Risk=low|Reward=Low/Medium|

Usually bond funds are used to preserve capital and produce income in retirement. Money put in Bond funds CAN decrease in value, but usually the income produced from monthly dividends from these funds offset SOME losses due to fund performance

3. Balanced Funds-|Risk=Low/Medium|Reward=Medium/High|

These funds are usually pretty good at protecting from large losses due to the fluctuations of the stock market. It won’t protect you FULLY, but it will lessen the blow dramatically if the market tanks.

Did you know you can actually build a portfolio of mutual funds? Just like you can build a portfolio of stocks you can build your portfolio solely of mutual funds. The reason why some people do this, is to limit their exposure of being to heavy in one area. Put all your money in Bond funds, and you could run the risk of your money not keeping up with inflation. Put all your money in stocks, and you COULD lose more money off your principal than you are willing to stomach. So mix it up, and diversify!!!

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Treasury Inflation Protection What?

There are so many acronyms out there for different types of securities that are either traded or bought by other investors it can be deafening. One of the many types of securities out there that are becoming more attractive these days are Treasury inflation protected bonds. They are usually call “TIPS” by most investors, and can either be bought individually, or through a mutual fund(Many “TIPS” collected together) called an “TIPS Fund”. I am going to outline how they work…

1.The principal(original balance) usually increases with inflation(cost of goods and services rise) and decreases when deflation(cost of goods and services decrease)

2.The interest rate is calculated and adjusted by the Consumer Price Index

3.Pays interest to the principal(Original balance) two times a year

4.Usually can buy them with 5 year,10year, 30 year maturities(the time when they stop collecting interest)

Most people use TIPS when they want to set aside a certain amount for the long haul. Plus unlike other securities, you can buy as many of them as you want(up to $5million) if you buy them individually with treasurydirect.gov. One of the best uses i think for using TIPS is to save and fund education. There are certain tax breaks you get when you use TIPS and other government securities to fund education for your kids. When i say tax breaks, i am talking about being exempt from federal taxes on the interest you receive from the payments you get that go to the principal(original balance) of the security.

You can also invest in a mutual fund that collects TIPS and sells shares of its fund. The only thing about a TIPS fund, is that in all honesty most of them don’t just collect TIPS, they collect treasury bond’s too which can somewhat muddy the waters a bit when you want a pure TIPS fund. My personal use for a TIPS fund would be to diversify my portfolio with bonds. My personal use for individual TIPS would be to fund my child’s education in the future. At least by investing in the individual security i know that the interest will always be above inflation, and not have to worry about wondering if the money i set aside will be enough to pay for his/her education.

If you don’t know what a mutual fund is, i will talk more in depth about it in another post i will be making soon. Almost forgot, the individual TIPS interest rate can be found here…. http://www.treasurydirect.gov/RI/OFNtebnd

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Welcome to Yinvestor!

Hello everyone on Word Press. This is my first time creating a blog. One of the main reasons why i started this blog was to educate people that are not quite familiar with investing in the market(as they call it), or how to invest. One of the main advisories i have to mention that i am NOT a Financial Adviser, or a person that is certified in any investment products. I am simply a average Joe investor that wants to spread the knowledge of investing to those that may be intimidated by getting involved in stock market investing.

Not to bombard you with investing on my first post, but there is more to investing than trading shares of stocks. The stock market is only a portion of what is called “traditional investing”. When i first started out i was intimidated by the market, and didn’t know how to tell what a stock was from a bond, or any other investment for that matter.I first started out thinking that it was only for people with a certain income level, or for people that had a lot to invest.

First off, anybody can invest. Second, there is nothing better than watching your investments work for you, and making good decisions that help you have more money in the long run. If you are already an investor you are more than welcome to add your 2 cents in concerning topics discussed. If you are a novice and know absolutely nothing, then sit back, and take in everything you are reading.

Here is a quick poll to take to figure out the popular opinion on investing(On Word Press at least)

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