Mutual funds
For most investors, especially those who don’t have the time or inclination to research individual stocks, mutual funds are the cheapest and easiest way to invest in the market.
You may be familiar with mutual funds already if you have a 401(k)—these are the investment vehicles that dominate most retirement plan investment menus. Mutual funds are essentially buckets of stocks (or another asset like bonds) overseen by a professional money manager and focusing on a particular investment goal or strategy, like picking the next wave of tech winners, generating dividends or simply matching the performance of a market benchmark like the S&P 500.
How to research mutual funds
You can buy mutual funds through a brokerage account or directly from mutual-fund companies themselves. You can start your research by looking at funds’ one- or two-page fact sheets, and get more in-depth information from a fund’s prospectus. Both should be available on the fund company’s website. Alternatively, research firms like Morningstar publish independent, in-depth research and rankings on thousands of funds.
Just remember: Focus on a fund’s investment fees, known as the “expense ratio.” Funds with low investment fees have been shown to regularly outperform more expensive funds in the long run, since fees put a drag on your fund’s investment returns.
How to invest in index funds
Traditionally, mutual funds employed a portfolio manager who aimed to pick just the best-performing stocks, hopefully delivering higher returns than the market as a whole. About a generation ago, a new kind of fund began to gain popularity.
Index funds don’t try to beat the market, but merely try to match its performance—essentially by owning small amounts of every stock available. This strategy of delivering “average” returns, may seem boring, but has a huge advantage: It allows portfolio managers to keep the fund’s operating costs as low as possible, a boon to performance.
In fact, while it may seem counterintuitive, research shows in the long run low-cost index funds tend to outperform most actively managed funds. Although there are plenty of skilled active managers, most stocks are fairly priced, making it hard to reliably find bargains that others have missed. At the same time, researching stocks is expensive, and since a fund’s investment fees are counted against its investment returns, most of these funds struggle to match, much less beat, the average market performance that stock indexes represent.
ETFs
Exchange-traded funds are a type of mutual fund that trades on a stock exchange like stock.
For many investors, that makes them more convenient than traditional mutual funds because you can own ETFs in your brokerage account alongside individual stocks, and you can buy and sell them throughout the day. (Traditional mutual fund shares can be traded just once a day.)
Most ETFs are index funds, meaning they merely aim to match the returns of a stock market index, although some target very narrow slices of the market, such as just tech stocks or just energy stocks. Check out Buy Side from WSJ’s picks for Best Dividend ETFs, Best Vanguard ETFs and more.
Robo advisors
If you’ve just started on your investing journey and you don’t have a clear sense of your goals and timeline, a robo advisor might be able to help you get started. Robo advisors are algorithm-based investing tools that use automation—and the responses you provide in an online questionnaire—to come up with a mix of investments, typically made up of stock and bond ETFs to meet your individual needs.
They cater to newer investors who might not have the money to hire a professional, or who don’t have the time or the investment knowledge to self-manage a portfolio.
“Robo advisors are very good entry level tools for investment planning,” Hoernicke says, but he adds that the advice is only as good as the quality of the data the program collects. “It should be more than two questions,” he says. “It should be a good set of complex questions to get a good idea of what you’re planning for.”
Buy Side for WSJ’s pick for Best Overall Robo Advisor is Betterment and you can find our full roster of picks here.
Financial advisors
Once you reach a point in your life when you have significant wealth and financial obligations to match—such as figuring out how to budget for a child’s college or your own retirement—you may want to seek advice from a professional.
The roughly 200,000 financial advisors in the nation come in many different stripes. While wealth managers tend to cater to affluent investors who have accrued at least seven-figure portfolios, you don’t need to be a millionaire to get personalized financial advice.
One thing to remember: Some professionals who provide advice and sell financial products also receive commissions from those activities, which can create a conflict of interest. Seek out an advisor who is a fiduciary, which means they are legally obligated to work in a client’s best financial interest and not their own, as well as one who is fee-only, meaning that they don’t earn sales commissions on the products they sell. You can find Buy Side from WSJ’s complete guide to finding a financial advisor here.
