Everyone keeps telling you to invest, but what should you actually invest in? Investing can be very overwhelming as there are thousands of options to choose from! Its total INFORMATION OVERLOAD! That’s why in this article I will share the best investments for recent graduates.
What to invest in:
In my previous article, “Should I Invest my money” I introduced stocks, which represents ownership in a corporation. But stocks are just one option that you can choose to invest in. There are 4 main types of investments that you can choose from: Bonds, Stocks, Mutual Funds, and ETFs.
Bonds are financial products given out by governments and companies to raise money for various projects. If it is a government bond, it is extremely SAFE because it is very unlikely that the Canadian government will ever go bankrupt. People invest in bonds because they are usually safe investments, but they only give an average return of 3 or 4% which is very low.
As you know, stocks represent ownership in a corporation. You can choose to invest in companies that you know like Apple or Lululemon, or in specific industries like Tech or Cannabis. The returns and risk of stock is unlimited.
For an example, in 1986, you could have bought 100 Apple stock for 0.34. If you kept those stocks, today each stock is worth $267. That means you would have $26,700 (267*100). But let’s say if Apple goes bankrupt tomorrow, than your left with $0. This example shows that stocks are VOLATILE, which means the value of the shares fluctuate drastically. Unless you like the thrill of gambling, where you could make or lose a lot of money, choosing individual stocks may not be for you.
3. Mutual Funds:
Think of mutual funds as a pool of many different stocks and bonds of different corporations across various industries. If you invest in a mutual fund, your money gets distributed among all of the various stocks and bonds. So even if one corporation goes bankrupt, your investment might not be high impacted. Mutual funds are a popular choice because you are diversifying your money across thousands of corporations and businesses. However, mutual funds are managed by fund manager which means the manager takes a cut of any returns that you make.
4. ETFs (Exchange Traded Funds):
ETFs are very similar to mutual funds where it consists of a pool with many different stocks and bonds across various industries. The major difference from mutual funds is that instead of being actively managed by a fund manager, ETFs tracks an “Index”. Indexes are a collection of the top performing corporations. The S&P 500 is the most popular index which is a collection of the top 500 corporations.
Since the ETFs are not managed by someone else, the fees are usually lower than mutual funds. When chooseing between an ETF and Mutual Fund you have to ask yourself do you think you will be able to out-perform the index if you were to have your investments managed by someone else. If the answer is YES, then choose mutual funds, and if NO then choose ETFs.
However, according to marketwatch and seekingalpha.com, only about 8% of fund managers can actually out-perform the S&P 500. Also keep in mind, even if you are beating the market by 1%, you may be paying extra fees of 1.5%.
Best investments for recent grads
So as a recent grad myself, I would choose to invest in either mutual funds or ETFs due to the benefits of diversified investments. Personally, I favour ETFs over mutual funds because of the lower management fees and the low likelihood the investments would actually be able to out-perform the average market returns if it were actively managed.
Yay! Now you know you should probably invest in either ETFs or mutual funds (that you can set up at your local bank or online). However, there are thousands of different types of ETFs/ Mutual Funds where some are risker with higher returns, and others that are safer but with lower returns. If you want to know what type of ETF/Mutual fund you should invest in, subscribe to stay notified once I release the article!
Related Article: If you want to know how people actually make money invest, read “How to invest to make money Investing.”