Sound investment management always starts with asset allocation. The biggest decision you can ever make as an investor is the portion of your assets you invest in stocks. This decision alone is responsible for around 90% of the returns you’ll see over the years in your portfolio. The other 10% is based on whether you’re investing in U.S. stocks or international stocks, large cap or small cap, and value or growth.
Once you decide the proper allocation for you and your family, the next step is to select specific investments to buy. Maybe that’s an S&P 500 index fund. Perhaps it’s a small cap value stock fund. Whatever the asset class, if you choose to invest in a fund you’ll have two predominant choices: a mutual fund or an exchange traded fund (ETF).
Both can be great investment vehicles, but they are very different animals. Making a sound decision surrounding which vehicle is best for your strategy is important, and one that many investors overlook.
This post will describe these differences, and how to determine which investment vehicle is right for you.