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More than half of Americans (53%) say they are currently investing in exchange-traded funds, mutual funds or index funds, according to one New NerdWallet survey. The same group of respondents shared what factors they consider when choosing an investment, and while some factors are important considerations, others are probably not of primary concern.
Here are some approaches you might want to use in your own investment research, as well as what you can avoid.
Things to consider when choosing a fund
1. Keep in mind the developments, but don’t try to predict the future
According to the NerdWallet survey, 44% of Americans invest in ETF, index fund or mutual fund said they chose a fund based on its future growth potential and 32% chose a fund based on historical growth. You can compare the past trajectories of funds, but it is important to understand that past performance is not a guarantee of future growth. And instead of trying to identify which narrow sectors will thrive in the future and invest in, you may want to choose a broad index fund that reflects market index performance – like the S&P 500.
– are shown to make a profit over a longer period of time.
Passively managed index funds and ETFs tend to be low-cost options for those who want a way of diversifying their portfolio.
2. Reduce costs so that they do not eat all the profits
The survey found that nearly 3 in 10 Americans who invest in ETFs, index funds or mutual funds (28%) say they choose a fund based on which funds have low fees. Again, passively managed funds tend to bring lower costs, while actively managed mutual funds can be more expensive because a human advisor is choosing investments.
When evaluating costs, a key factor to consider is funding cost ratio. This is an annual fee expressed as a percentage of your investment. You should compare the cost ratio of the fund you are looking at with the cost ratios of other similar funds to ensure that you are evaluating it in context. While 1% may seem like a low fee, it can cost tens or even hundreds of thousands of dollars over time compared to a fund with an expense ratio of 0.25%.
3. Consider social impact if it’s your priority
About a quarter of Americans who invest in ETFs, index funds or mutual funds (24%) say they choose funds that include companies or industries that match their beliefs, according to the survey. Socially responsible investmentSRI, or SRI, is gaining popularity and allowing investors to choose funds that include companies that do well around the world, such as promoting racial equity or sustainable operations.
“Doing good” means different things to different people, but you can start by sifting through the sums of money based on the factors that are important to you. Remember to check the cost rate for any SRI fund you are interested in, as you may find that some have higher fees than traditional funds.
What to consider when choosing a fund
According to the survey, among Americans invested in ETFs, index funds, or mutual funds, 19% say they choose funds recommended by loved ones and 13% say they choose the funds discussed. in the media. Even if your loved one is a financial professional or financially savvy, getting investment information from friends and family may not be a great idea.
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Instead, do your own research. Likewise, the investments discussed in the media may not best suit your needs. And consider your personal financial goals, risk tolerance, and the amount of time you have to invest when choosing your investments.
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Erin El Issa writes for NerdWallet. Email: [email protected]