Posts Tagged ‘Mutual Funds’

If I open a Roth or traditional IRA, would I be better off investing in mutual funds or ETFs?

What are the advantages and disadvantages of each?

Nobody else is going to look after you in your retirement. It is up to you. So do not let there be any ‘ifs’ about it. WHEN you open your Individual Retirement Account, IRA then you can get into the question of whether a mutual fund should be an exchange trade, ETF fund or not.

An IRA is essential because it is your personal tax haven that the government has given unmissable tax benefits to. You are allowed to save/invest up to $2,000 each year into your IRA. Depending on your annual income and whether you currently have an employer-run retirement plan, you can deduct tax for the sum of money put in your IRA. Once in your IRA tax haven the money grows tax-deferred. You can invest this money in stocks, bonds, mutual funds, or other allowable types of investments to grow your IRA money tree.

You can grow your IRA money tree in the soil of the stock exchange in three different ways. Firstly you can work through a broker and trade directly in stocks. For example buy stocks in your favorite corporations such as Apple or Coca-Cola. Your money will grow because each year these corporations pay some earnings per share and will probably be worth more when you come to sell them too. The downside is of course that your chosen stocks may be in corporations that go broke like Bear-Stearns or Enron.

The second way you can grow your IRA money tree is by contributing to a mutual fund. This is a pot of money that is professionally managed and invested in stocks on behalf of the contributors. As the stock exchange values grow so does the value of the mutual fund and so does your share in it. The stock market has its ups and down but generally the trend is up. So it is has been a good long-term investment for IRA’s.

Exchange Traded Funds ETFs are portfolios of stocks, bonds or in sometimes alternate investments that are bought and sold the stock exchange just like Apple or Coca-Cola stocks. The advantage of ETFs is that grow your money more because they payout like stocks and appreciate in value like stocks. But while they have a bigger upside they also have a bigger downside.

Currently nearly all ETFs are index funds, which means that they follow the performance of one or more stock or bond market indices. “Spiders” for example track the Standard and Poor’s 500 index of corporate stocks while “Qubes” (their NYSE ticker symbol is QQQQ), follow the 100 largest non-finance stocks on the NASDAQ.

In conclusion you can choose from a variety of nearly 200 different types of ETFs but remember the bigger the return the greater risk of loss.