A mutual fund allows investors to pool money together to purchase a collection of stocks, bonds, or other securities that might be difficult to replicate on their own. ETFs are similar, but are traded throughout the day instead of at the end of the day (we’ll discuss intraday pricing later). Most ETFs, about 90%, are passively managed. Passively managed mutual funds are much less common; about 30% of mutual funds are index equity funds. Since most ETFs are low-cost passively managed funds, some may assume that makes ETFs superior to mutual funds, but is that actually the case?

Misconceptions

“Index funds” are often seen as their own category of funds, but index funds can be either mutual funds or ETFs. Mutual funds have a history of being actively managed, but about 30% of mutual funds are now passively managed, so that perception is becoming outdated. Another misconception is that ETFs are better than mutual funds. While it is true that most ETFs are passively managed and most mutual funds are not, that does not mean all ETFs are better than all mutual funds. Let’s see how they stack up.

Expenses

Using data from Morningstar and the Investment Company Institute, we know that the median mutual fund has a greater expense ratio than the median ETF. Mutual fund equity and bond funds are also more expensive than their ETF counterparts, but when it comes to index equity funds, the median mutual fund has a lower expense ratio than the median ETF. Despite the perception that ETFs are cheaper than mutual funds, that isn’t always the case. Funds should be evaluated on a case-by-case basis. If you are investing in an index fund, mutual fund or ETF, the expense ratio should be extremely low. There are even a few index funds available that have zero expenses.

Pros and cons of mutual funds

Mutual funds provide a diversified mix of stocks or bonds and are generally not as risky as single stocks. There’s a mutual fund available for just about everything you can imagine. Investors pool their money together in a mutual fund, and they aren’t traded throughout the day on a stock exchange, so you may be able to invest any amount into a mutual fund (you don’t have to buy whole shares). 

Mutual funds only trade at the end of the day, which can be a turn-off to investors who would like to trade when the market is moving during the day. There are also minimum investments for some mutual funds that may be thousands of dollars. Younger investors may not have thousands of dollars to invest at once, and high initial investments may exclude some investors. Mutual funds aren’t as tax-efficient as ETFs due to embedded capital gains and distributions.

Pros and cons of ETFs

ETFs can provide a diversified mix of stocks and bonds just like mutual funds, and there are a wide range of ETFs available, although there are not as many ETFs as there are mutual funds. One advantage ETFs have over some mutual funds is that there are no minimum investments other than the share price of the ETF. You don’t need thousands of dollars to start investing, so ETFs are more accessible to younger investors and those that can’t make a high initial investment.

ETFs trade throughout the day similar to stocks. That could be a good thing or a bad thing; it’s nice to have the ability to make trades throughout the day, but if you’re a long-term investor you may not necessarily need to make trades throughout the day. Not having the ability to trade throughout the day could prevent you from selling or buying at an inopportune time. Unlike mutual funds, you can’t make any size investment into an ETF; you must buy a number of shares. Because of this, you can’t automatically dollar cost average into ETFs. There are trading fees with some ETFs, and smaller ETFs that aren’t widely traded may have some liquidity issues (you may have trouble finding a buyer or a seller).

Are ETFs better than mutual funds?

ETFs and mutual funds aren’t natural enemies and you don’t have to choose between one or the other. They’re both very similar but have some differences, and depending on your investment goals you may want to invest in one or the other or use both in conjunction with each other. Watch our most recent show, “The Pros and Cons of Mutual Funds and ETFs (Which Option is Best?),” to make sure you understand the differences between them so you can make an informed decision. Watch it now on YouTube below.

Mutual Funds vs. ETFs: is this the showdown of the century? While it’s fun to pit things against each other in friendly competition, we believe both of these funds can be used for good. Mutual Funds and ETFs can be super friends, but you must understand the pros and cons of each and how they impact your unique financial situation.

Let’s unpack what these funds are, how they work, and which strategies might be right for you!

Research and resources from this episode:

• 2019 Investment Company Fact Book (ICI)
• Bond ETF Price Discovery Is A Mess Right Now (ETF Trends)
• The Recent Volatility in Bond ETFs Explained (PWL)
• Bond ETF discount during recent volatility (Vanguard)
• Trends in Expenses and Fees of Funds, 2019 (ICI)

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It’s an exciting time to be an investor because price wars have been gradually bringing down the cost to invest in recent years. But is it really possible to invest with zero fees?

Well, as a matter of fact on August 1, 2018, Fidelity Investments announced two index funds that will operate without annual expense charges (internal expenses) and without a minimum investment requirement.

We’ve observed the industry has been slowly moving toward zero, and it looks like it has finally gotten there. Join us for this week’s episode of The Money Guy Show to hear us discuss this big news about zero-fee investing and what it can mean for your wallet and future.

In this week’s episode, you’ll find out:

• Why a zero-fee investment option is now available to current investors
• How the average investor benefits from the competition between fund managers
• How Fidelity’s competition responded, and will they follow Fidelity down this path to zero, too?!
• What you as an investor should anticipate from zero-cost investment providers
• What you can do with this news.
  • Hint: Take a closer look at your current holdings, make sure you’re maximizing all your resources and current technology to leverage the right opportunities, remember you have choices
• Red flags investors should watch out for when it comes to investing in mutual funds
• How to research index funds and how much you’re paying for yours
• What taxes have to do with the fees you pay (or don’t pay)

Resources Mentioned on the Show

• Investment Company Institute (ICI) – 2017 Investment Company fact book
• Money Guy Show Episode: Unbelievably Useful Tips for Buying Mutual Funds

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Mutual funds. Many people use them as part of their long-term investment strategy, but how do you pick which mutual fund is right for you?

Don’t miss this week’s 10-minute episode where we share the two ways you can buy mutual funds and trends you should watch for as an investor with choices.

Key tips from this week’s show:

• Understand what a mutual fund is and how it works
• Hear Brian’s first mutual fund experience
• Find out the two ways you can buy a mutual fund
• Uncover the costs of owning your mutual fund
• Hear the good news of falling expenses associated with mutual funds
• Know which resources to use to understand what fees and commissions you are paying on your mutual funds

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us:  brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Should an investor ever buy individual stocks or is it better to stick with a mutual fund of one sort or another? This question is the subject of a recurring debate among financial professionals, with some absolutely committed to a mutual fund only approach and others just as devoted to buying individual stocks.

The right choice for you depends on a variety of factors, most of which revolve around the amount of risk you’re willing to take and how much time you can devote to studying the market. You’ll understand these factors better with a little basic knowledge, so let’s have a quick look at the difference between investing in mutual funds and purchasing individual stocks.

Mutual Funds vs. Individual Stocks

1. Mutual Funds

Essentially, a mutual fund is a way of investing that’s comprised of a pool of money collected from many different investors in order to buy securities like stocks, bonds, and other types of assets. Mutual funds are managed by a financial professional whose function is to invest the fund in a variety of assets and generate income for the individual participants.

There are many complexities involved in mutual funds, but their essential features can be summed up as follows for our purposes:

• They’re marked by high levels of diversification.
• Relative to buying individual stocks, they’re lower-risk.
• They require less time, knowledge, or effort on the part of the individual investor.

2. Individual Stocks

Put simply, individual stocks are shares of a specific company. When investors purchase individual stocks, they’re essentially betting on a single company to succeed and generate a profit for them. There are many different pros and cons involved with buying individual stocks, but the short version is that some people succeed brilliantly with individual stocks, while others lose significantly. Here are some of the most important features of individual stocks:

• Unless you purchase individual stocks from companies that represent a couple dozen or so industries, your portfolio will not be diversified.
• Relative to mutual funds, they’re higher-risk.
• Success with individual stocks requires constant attention and a bit of luck.

Should You Ever Buy Individual Stocks?

The idea of making a huge stock market splash and getting rich quickly is a tempting one. That’s why so many people are looking to get in on the ground floor of the next Google or Microsoft. Unfortunately, there are at least as many colossal disasters (think Enron) as there are great success stories. Opinions differ on whether or not you should buy individual stocks, but the majority of experienced financial professionals counsel against it. The reasons? Because individual stocks can be difficult to manage for the average investor and riskier than most people have an appetite for. That being said, adding a few individual stock holdings if you already have a well-diversified retirement portfolio established may make sense.

    [RELATED CONTENT: 6 Signs Your Money is Properly Diversified]

Here’s a quick way to decide for yourself. If you can give a definitive yes to all of the following questions, then individual stocks just might be a reasonable investment vehicle for you. Here’s what you need to ask yourself:

• Are you able to expose yourself to a certain level of risk without compromising other financial goals?
• Are you willing to spend several hours a day researching companies and learning about the market, or hiring someone else to manage your stock holdings for you?
• Do you have enough extra capital to purchase individual stocks? (above and beyond what is already allocated to your other spending, saving, and giving categories)
• Do you think you want to assume the additional stress that comes with the inevitable highs and lows of investing in individual stocks?
• Can you lose 100% of what you invest in individual stocks without suffering a major financial setback?

A Compromise: Index Funds

Of course, there’s much more involved in individual stocks than the previous five questions. Though, in almost every case, investing in individual stocks as a wealth-building strategy is not something we recommend for our long-term, goal-minded investors. The inherent risk tends to outweigh the potential rewards and simply aren’t necessary to reach financial independence.

That being said, there is a compromise between buying individual stocks and investing in mutual funds, and they are index funds. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500).

We like index funds, because they can offer broader market exposure, which makes them less risky than individual stocks. They also typically feature fairly low operating expenses; in fact, they are downright cheap relative to other actively managed investment vehicles.

 [RELATED CONTENT: Index Funds 101: How to Pick ‘Em]

Your investment strategy should be just that: a strategy. Therefore, before making any decisions about which investments you use to help you reach financial independence, attain your financial goals, and retire with enough money one day, have a plan based on your needs and goals. The right investment choices for you will largely depend on what you want to accomplish and when, but chances are individual stocks may complement an existing investment strategy at most.

Knowing how to prioritize your money is what we talk about in this week’s episode of The Money Guy Show. We share some simple guidelines that will better inform you as to where your next dollar should go. From saving it for a rainy day to maxing out your Roth IRA, tune in to find out what your next move should be.

This week’s episode covers:

• Smart choices you can make with your next dollar
• Where to start prioritizing your money and what comes next
• Understanding your basic financial needs versus aspirational financial goals
• A simple checklist for knowing where your next dollar should go based on where you are today
• Whether you should pay debt or invest first
• How much you can contribute to various retirement accounts and which ones you should max out
• How to determine how generous you can be with your financial resources
• Clear review of the steps you can take to live like no one else

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Just as a little primer, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). So, stay with us as we dive into the details and zoom out to the big picture takeaways that you as the investor should know.

In this episode, you will learn:

• How to return the market performance
• Why 80% of investors don’t own the S&P 500
• The huge benefits of index funds
• What the heck “closet index funds” are
• Why you should be excited about the average expense of mutual funds
• What index funds charge today versus what they charged a few years ago
• Why index funds are great from a tax-efficiency standpoint
• How to know how tax-efficient your funds are overall
• How to understand and interpret turnover ratios and why it matters
• What you need to know about tax-cost ratios
• What an efficient marketplace is
• Trends you should be aware of within the market
• Ways you can invest in index funds and what to watch out for

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Brian and Bo jump into the Brexit conversation and give you their insight on the events and subsequent market volatility. The guys also talk through the differences between ETFs and Mutual Funds and explain which one may make the most sense for your situation.

Basically, the Brexit event really should not affect anything at all from most people’s day-to-day activities. In fact, nothing should come from this vote in the short-term since it will take weeks, months, and years to work through Britain’s exit from the European Union. While the news drove markets into mayhem, we have seen a nice rebound now that people have realized there was a knee-jerk reaction to the news not the implications of the news. The Money-Guy duo wanted to give you a quick overview of the countries that make up the United Kingdom and how the region is broken down:

After the quick rundown on Brexit and its implications, Brian and Bo spend the rest of the episode comparing and contrasting ETFs and Mutual Funds. Mutual Funds are the biggest player on the block for the time being, but ETFs have become more popular in the recent years. We often hear people say they want to invest only in ETFs or build a Mutual Fund portfolio, but it is does not have to be one or another. Both offer benefits and, depending on the asset class or specific sector you wish to invest in, one may be more efficient than the other. Listen in to this week’s show to learn the history of these two investment vehicles and where they belong in your portfolio.

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.  

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian [at] money-guy.com and bo [at] money-guy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Brian and Bo discuss the strategy behind asset location and give you a breakdown of their thoughts when designing investment portfolios. The guys give you the rundown on tax-efficiency and cover the three “pots” of money in the investing world 1) Taxable 2) Tax-Deferred 3) Tax Free.

Here is the overview of how the tax game works across the different investment accounts:

Taxable Accounts – Traditional brokerage accounts (Individual, Joint, Tenants in Common, Tenants by the Entirety, and certain Trusts). This is where you see short-term and long-term capital gains taxation as well as special tax treatment for qualified dividends. We like to see long-term investments, muni bonds, and holdings that generate qualified dividends in these accounts.

Tax Deferred Accounts – This is your 401k, 403b, other employer sponsored retirement plans, and non-Roth IRA’s. When contributions are made into these accounts you get an income tax deduction, and the assets grow tax deferred until you pay ordinary income tax upon taking distributions. The best holdings for these accounts are investments that generate income, like bond holdings, certain MLP’s, REITS, and hedged securities.

Tax Free Accounts – These are the Roth accounts that you are probably continuously hearing about. Assets go into these accounts after tax and grow completely tax free if certain qualifications are met. This is where you want to hold highly appreciable assets so that you never have to pay tax on the substantial gains that you hopefully make.

Along with this topic we feel it is absolutely necessary to cover what-not-to do in these investment accounts:

First, try not to over-complicate your situation. If you need to go back to school to understand an investment, it is most likely an investment that you do not need to make.

Second, if you are already benefiting from preferential taxation inside of a retirement account, it does not make sense to hold investments that have equally preferential treatment in that same account. We often see this when people hold annuities within their IRAs.

Third, be wary of off-shore investments and private placements. Not only do you need to be considered a qualified investor, these investments are often very illiquid and can be hard to find an exact valuation. These types of investments can often be rewarding in the right situation, but generally carry more risk than your more traditional investments. This goes back to our first word of caution; do not get sold on an investment that you do not understand.

In this episode Brian and Bo dig into the active vs passive argument. It seems like there is a constant battle among investors and advisors about their stance on active and passive management. Brian and Bo share their opinions and give a behind the scenes look of their investment philosophy.

It is no secret that the U.S. equities market “knocked the ball out of the park” in 2013. That is not to imply that it is time to dump all of your money back into the market. This week we are hopefully going to put this argument to rest (for now). While you are listening to this episode it is important to remember that, “there is more ways than one way to skin a cat.” The guys base the show around an article from Morningstar, Where It Pays to Be an Active Fund-Picker, by: Lee Davidson.

Investopedia defines Active, Passive, and Index Investing as follows:

– Active: An investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions.

– Passive: An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.

– Index: A form of passive investing that aims to generate the same rate of return as an underlying market index. Investors that use index investing seek to replicate the performance of a specific index – generally an equity or fixed-income index – by investing in an investment vehicle such as index funds or exchange-traded funds that closely track the performance of these indexes.

Brian and Bo use this podcast to explain their thoughts on the different investing styles as well as when and where to put each of them to use. This week’s show is a great place to start when designing your portfolio and gives you a “peak-behind- the-curtain” at the guy’s view on the investment selection process.

Don’t forget to go check out our Twitter feed to get more frequent access to us as well as sneak peeks and behind the scenes looks at The Money-Guy Show.