Index Funds vs. Mutual Funds | Phil Town

your financial adviser is probably going to give you choices in your 401k or in your IRA between index funds and mutual funds index funds or mutual funds and a lot of people are talking now that you don't need to be buying mutual funds because they charge fees of 1 2 3 % 5% some of them crazy huge fees coming off the top no matter how good they're doing if they give you be losing your money and they they would still charge you fees whereas index funds theoretically don't charge very much fees just a small fee well let's talk a little bit about those choices because it might be a kind of a false choice mutual funds certainly have higher fees than some index funds but mutual funds are basically doing the same thing that an index is doing and that is diversifying your portfolio across hundreds and hundreds of stocks an index fund does the same thing except it's very specific to the index that is tracking so for example you could buy let's say fidelity Magellan mutual fund which is essentially a shadow of the broad market sp500 or you could buy SP Y which is the index fund that tracks the S&P 500 exactly so the S P Y stock essentially has 500 stocks in it okay that's what makes it the market now why not do those okay why not do them well there's a couple of reasons the first is they're great to do index funds or mutual funds if you have a lot of time before you need your money and if you're making enough money and saving enough money into this into this account where it can add up to enough money for your retirement unfortunately there's a lot of baby boomers out there right now no chance that a market rate of return will get them to a number that will allow them to retire for the rest of their lives so that's a problem with index or mutual funds now the other thing that you need to know about index funds which are often sometimes called exchange-traded funds or ETFs is that you can be in a liquid ETF you can move in and out of it very easily unless it starts to drop significantly if fear starts to build up in the index that it's tracking that et F might become ill liquid I'm thinking specifically about bond related exchange-traded funds which own very illiquid bonds underneath this liquid exchange-traded fund so it's an index alright it's tracking bond indexes but men if that thing starts to drop that ETF could very quickly become something you can't sell at any kind of a price now I'll tell you there's great AI investors out there like Carl Icahn who are warning about the dangers of some of these ETFs and index funds really damaging and small investors and becoming the next big lever to crash this market and create another financial panic now I'm going to tell you if you want to be a passive investor then go ahead do it I don't know what other choice you have if you're not willing to learn how to invest amen you're gonna have to go with whatever you can get because investing is about knowledge and that's what we want to teach you is how to invest so if you like this kind of stuff leave a comment you guys maybe we can dive deeper into it and please subscribe to our YouTube channel time to go play

Channel: Rule #1 Investing

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Id: iYme-X1rPRI

Length: 3min 18sec (198 seconds)

Published: Wed Dec 23 2015