Thursday, August 24, 2006

Investing in Reality 

I recently discovered Yahoo Answers. Before you click on that link, I should warn you that that site is virtual crack. I've been busily answering random questions, enjoying sharing my opinions and advice with people who actually want to hear them.

I also asked a couple of questions, one of which was "What's the difference between a Mutual Fund and an Exchange Traded Fund?". I had read several comments lately on different sites from armchair investors claiming that ETFs were the superior investment, and I wanted to know why. But after getting my question answered, I think I will stick with my trusty old mutual fund.

If you own a share of stock, it means you own a small piece of a company. Mutual funds are where a bunch of strangers pool their money to buy a lot of different stocks. So when you buy a share in a mutual fund, you're actually buying very small pieces of lots of companies. But exchange traded funds are one more level removed from reality. They start out like a mutual fund: a bunch of people pool their money to buy stocks from several different companies. But then people are allowed to bet on the performance of the list of stocks in that fund, and the price of the shares in the ETF is based on how well people think the fund is going to do, as opposed to being based on the value of the stocks of the companies which make up the fund.

I am not a betting kind of person. Investing in the stock market is iffy enough for me, but at least owning a share of stock is owning a piece of a real thing. Buying a share in an ETF seems to me like investing in the idea of a group of stocks, and I don't have enough money to risk it in Wall Street's version of Hot or Not.


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