“Knowledge comes, but wisdom lingers.” – Alfred Lord Tennyson

Now that you’ve decided on a certain amount of income you’d like to invest every month, where exactly should it go? While I will be talking about active investing and how to select winning stocks in a series of upcoming posts, I’d like to start off by looking at the other side.

Passive investing puts all the work into someone else’s hands. Basically, you can either go with mutual funds (unit trusts) or index funds:

Mutual Funds

By putting money behind a fund manager and the company he or she works for, you’re buying into a certain philosophy on investing and risk. You’re hoping that they know more about the market and can outperform everyone else.

A great way to chose fund managers is to look out for open communication, thorough research, good governance, low expenses, and a willingness to invest their own money alongside yours. Be thorough in checking out their past performance in order to determine whether or not it will be sustainable going forward. 

Index Funds

Instead of struggling to determine who to invest with, you effectively invest with everyone when you buy “the market” in the form of an index like the S&P 500 or ALSI. Because expenses charged for mutual funds are more than those charged for index funds, mutual funds must perform even better to achieve the same end return.

Index funds recognise that predicting the future is impossible, which means beating the market consistently is incredibly unlikely. Of course there are exceptions to the rule (like Warren Buffet or Peter Lynch) but finding these people in advance and hoping they prove just as prescient going forward is hard. As with most things in life, safety should be your first concern.

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