Chapter 6: Mutual Funds and ETFs
How does a ETF or Exchange Traded Fund work?
An ETF works in a very similar fashion to a mutual fund. All investors pool their cash, and then a company allocates these funds to a diversified portfolio of stocks or alternative investments.
With one key difference: Passive Management
But why is this better?
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Following an index is a solid strategy because it means your investment will track the overall market, which has consistently risen over the past 100 years. While there will be ups and downs, the long-term trend has been upward, making index investing a reliable way to participate in the market’s growth over time.
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Another great advantage of index investing is the low fees, which allow you to maximize your gains. These fees are lower because index funds are passively managed, meaning they simply track the market rather than relying on active management strategies. This cost efficiency helps more of your money stay invested and grow over time.
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Index investing is very hands-off, which reduces the chances of making mistakes—a common pitfall for all investors. Since it requires minimal time and effort, you can let your investment grow steadily without constant monitoring. Over time, as the market rises, your investment grows, and one day, you may find yourself with significant wealth, all without the stress of active management.