Investing 101: Conclusion
  1. Investing 101: Introduction
  2. Investing 101: What Is Investing?
  3. Investing 101: The Concept Of Compounding
  4. Investing 101: Knowing Yourself
  5. Investing 101: Preparing For Contradictions
  6. Investing 101: Types Of Investments
  7. Investing 101: Portfolios And Diversification
  8. Investing 101: Conclusion

Investing 101: Conclusion


We've introduced many topics in this tutorial:

  • Investing is about making your money work for you.
  • Reinvesting your earnings allows you to take advantage of compounding.
  • Each investor is different in his or her objectives and risk tolerance.
  • There isn't just one strategy that can be used to invest successfully.
  • Each investment vehicle has its own unique characteristics.
  • Diversifying investments in a portfolio helps to manage risk.
Together, all these points make up a foundation of knowledge with which any investor should be comfortable. However, these concepts mean nothing unless you can put them into practice. It's great to know that compounding accelerates your investment earnings, but the real question is how do you take advantage of compounding and actually make money? In this section we'll go over an example that demonstrates how to put all of what you've learned into action.

The Strategy
For our example, let's look at a fictional investor named Melanie. Melanie is a twenty-something who is relatively new to investing. Melanie knows that she wants to invest, but isn't sure just how to do it. Her knowledge of finances is good, but she has no desire to spend her free time poring over financial statements (or losing sleep because of her investments).

After checking out this tutorial and reading more about stocks and mutual funds, Melanie learns that there are two basic styles of portfolio management: passive and active. Each of these styles results from a different approach to the market. The goal of active management is to select securities that will perform better than the overall market. For example, when a mutual fund manager analyzes a company's financial statements to determine if the stock is suitable for the fund, he or she is actively managing the portfolio.

A passive investor on the other hand has no desire to try to beat the market. Instead, relying on the stock market's history of increasing over the long term, the passive investor, perhaps believing that trying to beat the market is too much work or even futile, will simply purchase a security such as an index fund, which mirrors a benchmark used to track the performance of a market.

Melanie decides that passive investing is more her style, so her investment vehicle of choice is the S&P 500 index fund. This is a mutual fund that is indexed to the S&P 500, which is composed of the 500 largest companies in the U.S.

Why an index fund?
  • Buying an index fund is passive investing, so Melanie is still free to have a life and doesn't have to worry about picking stocks.
  • Melanie gets instant diversification (because the fund owns many different kinds of stocks) without having to invest huge sums of money. Most index funds can be set up with an investment of $1,000 or less.
  • Most importantly, the fees are far less than the cost of the average mutual fund. These lower fees are another advantage of passive investing. Because the fund does not have to pay some hotshot (and expensive) MBA fund manager to pick stocks, an index fund is often cheaper than any other mutual fund. (For more on this, see the Index Investing tutorial.)
Melanie doesn't just stop with her initial purchase. She uses an automatic payment plan with which she invests 10% of her paycheck every month. Investing a fixed amount every single month makes use of dollar cost averaging. By putting in, say, $100 each month (rather than a large amount once a year), Melanie sometimes buys when the prices of the units of the fund are higher, and sometimes when prices are lower. In the end, the purchase prices average out. The best thing about dollar cost averaging, though, is that it gets Melanie into the habit of saving every single month. Just about any fund company or bank will let you invest like this with an automatic payment plan.

Putting the Concepts to Work
And that's about all there is to it. It's pretty simple stuff, actually. And despite the ease of setting up a strategy like this, it allows Melanie to follow all the principles we've been discussing:

  • Her money is definitely being put to work, and she is becoming part owner of the 500 biggest companies in the U.S.
  • With no additional work on her end, she can reinvest all the money that gets paid out in dividends, which allows her to see the benefits of compounding over time, even more so if she sets this fund up in a retirement plan that allows her investment to grow without being taxed immediately
  • It's easy! This fits Melanie's preference to avoid the work of picking stocks. Those who do want to develop an eye for stocks, however, can get started with an index fund and then eventually work their way into more active strategies over time. (For further reading, see Guide to Stock Picking Strategies.)
  • A strategy like this can be molded to meet an investor's objectives and asset allocation. In Melanie's case, she has a time horizon of more than 20 years, so she is comfortable being completely in equities. If an investor is not comfortable with being just in stocks, it's easy enough to buy a bond index fund. It would still offer the low costs of indexing, and allow you to customize your asset allocation. (For more on this, see Being Lazy With A Couch Potato Portfolio.)
Please remember the above points are not meant to give you personal advice. We've already talked about how there is no one-size-fits-all approach. The point of this example is to give you a more tangible look at how an investor might implement the ideas discussed in this tutorial.



Perhaps most importantly, indexing in the long term doesn't do any damage. There are plenty of ways to lose money, whether in speculative investments or through excessive fees in mutual funds. On the other hand, it's possible to be too risk averse. If you put your savings under a mattress, we guarantee it's not going to increase in value.

There are many other alternatives out there. We strongly encourage you to explore them and see what works for you. But, for the average investor, the smart route includes saving regularly, keeping investment expenses down and being in the market for the long term. Whatever you do, keep the principles we've discussed in mind, and never stop trying to learn more.


  1. Investing 101: Introduction
  2. Investing 101: What Is Investing?
  3. Investing 101: The Concept Of Compounding
  4. Investing 101: Knowing Yourself
  5. Investing 101: Preparing For Contradictions
  6. Investing 101: Types Of Investments
  7. Investing 101: Portfolios And Diversification
  8. Investing 101: Conclusion
RELATED TERMS
  1. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  2. Passive Management

    A style of management associated with mutual and exchange-traded ...
  3. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  5. Equity Fund

    A mutual fund that invests principally in stocks. It can be actively ...
  6. Passive Investing

    Passive investing is an investment strategy that limits buying ...
RELATED FAQS
  1. What are the advantages of an index fund over an ETF?

    Diversifying a portfolio is one of pillars of investing basics, and an index fund can provide an investor with exposure to ... Read Answer >>
  2. When my mutual fund declares an income distribution, the fund price falls by a similar ...

    An income distribution from a mutual fund to its shareholders can take two forms: A shareholder can elect to be paid ... Read Answer >>
  3. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
  4. Why do index funds tend to have low expense ratios?

    Understand what an index fund is and why the nature of index funds causes them to have lower expense ratios than more actively ... Read Answer >>
  5. What's the difference between an index fund and an ETF?

    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
  6. What are the disadvantages of an index fund over an actively managed fund?

    Read the advantages an actively managed fund has over its more staid compatriot, the indexed fund, and make your own decision ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center