Involved in a finance conversation about saving for pensions, something I don’t have a clue about. Just smiling and nodding
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An ETF is an exchange traded fund. SPY is an ETF that tracks the S&P500. So basically you can go to your brokerage account and buy SPY and with that single ETF get exposure to all the S&P500 companies at once (US large caps).
EFT stands for “Exchange Traded Fund.” SPY is a specific EFT that does its best to gain or lose money at the same rate as the S&P 500 Index – a measurement of whether the top 500 stocks in the US are going up or down in value.
A very simple strategy to save for retirement is to invest your retirement account in SPY. You buy and sell it just like you would shares of stock. When you put more money in the account, you buy more shares. When you need to take money out, you sell some shares. And that’s it. No thinking about what company’s stock to buy. No watching to see if the market is going up or down and taking different actions.
It’s generally a very successful strategy. If the market does well, you do, too. If the market loses money, so do you, but you’re very likely to get it back soon enough without having to do anything at all.
It’s very hard to make mistakes following such a simple strategy.
A lot of buying and selling on the stock market is in individual stocks. Perhaps you look at Apple and think “I’d love to own one millionth of that company” so you buy a couple shares. If Apple does well then your shares go up in value, but if something happens to them then your shares go down in value.
Tracking individual stocks like that is therefore relatively high risk. A company that looks perfectly solid may have a scandal come out or perhaps they invest a ton of money into something that doesn’t pan out. It’s much less risky to invest in a wide variety of stocks. That can take a lot of time and attention, though, and if you want to invest $1000 then you’ll struggle to do so efficiently–with many stocks a single share can be hundreds of dollars, so perhaps you only come away with a small handful of different companies’ stocks.
That’s where mutual funds come in. Investment firms set up a fund with some investment strategy, like “US stocks” or “a 60-40 mix of stocks and bonds.” You can then put $1000 with the investment firm and they’ll add it to a pot with everyone else’s money, then they buy the stocks from there.
As a variant of a traditional mutual fund there are exchange traded funds. This just takes the mutual fund and lists it on the exchange as if it were a stock in and of itself, but buying “shares” of the ETF is functionally the same as putting it in a mutual fund account. This interface is simpler for many people.
Mutual funds come in various flavors. Some profess to make the best investing decisions, getting the highest yields for the lowest risk. For these lofty claims they charge high fees. Often they struggle to outperform the market over the long term, especially once those fees are taken into consideration. Other mutual funds just dump money into a common collection of big companies. The most popular set of companies to invest in is the S&P 500, a list of 500 large US corporations. The weighted average price of these companies is tracked under the stock ticker symbol SPY.
So the statement is “put your money into a mutual fund that tracks the S&P 500, via an ETF listing for simplicity.” It’s the most basic way of “putting money into the stock market” without being exposed to risk of individual stocks too bad. This is, of course, just one of countless investing strategies everyone’s investing needs differ, but that’s at least how to parse what was being said.
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