What I Wish I Knew About Mutual Funds And ETFs When I Started Investing
Investing primarily in individual stocks helped us get the high returns that allowed us to retire early. And even today, individual stocks make up the majority of our portfolio.
But it didn’t start out like that. Like many people, our first foray into investing began with mutual funds.
Back then, we knew nothing about analyzing companies or even how to go about buying and selling stocks. Mutual funds were less intimidating, but I still remember not really understanding what we were buying.
We didn’t understand the different types of funds. We never looked at expense ratios. We sort of just randomly picked a few funds and hoped for the best.
Ultimately, we had to correct some bad choices and still managed to retire before turning 50. But if we could travel back in time for a do-over, I’m sure we could’ve retired a few years sooner.
Here are the things I wish we knew back then.
WHAT IS A MUTUAL FUND?
Mutual funds are often how beginning investors get their feet wet. And if you invest primarily through a 401(k), your only options might be mutual funds.
With a mutual fund, your money is pooled together with money from other investors. The fund then uses that money to buy a collection of investments on your behalf.
You automatically get some diversification because many different stocks are being bought through the fund. Depending on the type of fund, professionals may be doing the research and deciding what to buy and sell for you in exchange for a fee.
This was the extent of my knowledge back in my 20s, and it sounded simple enough—hand money over to someone to invest for me.
Except that funds come in different flavors and I had to choose. Different funds had words such as growth, income, value, or target-date in their names.
I had no idea what any of that meant.
GROWTH FUNDS
I remember being told, “You need to have growth funds in your portfolio,” and wondering, “What are growth funds?”
So here it is.
Growth funds invest in companies that investors expect to grow faster than the overall market. These companies often reinvest their profits back into the business rather than paying large dividends to shareholders.
The hope is that as the companies grow, their stock prices will grow, too.
INCOME FUNDS
Income funds generally invest in companies that pay dividends or other investments that generate regular income. Companies that pay dividends tend to be more mature and may return some of their profits to shareholders rather than reinvesting all of them back into the business.
The thought of getting paid to own income funds was so enticing when I first started investing, but in reality it wasn’t that great.
With “income” in the fund’s name, I imagined receiving checks I could actually live off of. The actual dividend checks, though, were much, much smaller. They weren’t enough to even buy lunch, let alone live off of.
VALUE FUNDS
Value funds invest in companies whose stocks appear to be undervalued compared with what the investors believe those companies are actually worth.
The idea is pretty simple: buy stocks that appear to be on sale and hope the market eventually recognizes their value.
Of course, there's a catch. A stock can look cheap because the market has overreacted—or because the company really is in trouble. Figuring out which one is which is where things get interesting.
TARGET DATE FUNDS
A classic investing rule is to take on more risk when you're younger and gradually become more conservative as you approach retirement. The idea is that you have more time to recover from market downturns when retirement is still decades away.
Target-date funds do this for you. They automatically adjust the mix of investments as you get closer to the target retirement date, generally becoming more conservative over time.
You just need to choose a fund with a target date that roughly matches when you expect to retire.
If you were planning to retire around 2065, you might, for example, choose a Target Retirement 2065 Fund. Some funds use the number of years until retirement instead of a calendar year.
INDEX FUNDS AND TOTAL-MARKET FUNDS
An index fund is a fund designed to track a particular market index rather than having a manager choose individual investments. For example, the Fidelity 500 Index Fund would buy stock in the same 500 companies that the S&P 500 index tracks.
A total-market fund takes diversification even further by attempting to track a broad index of the overall U.S. stock market.
An easy way to think about index funds is to imagine a streaming service, like Netflix. Instead of choosing individual shows yourself, you subscribe to a service that gives you a predetermined lineup. The particular index determines which investments are in your lineup. A total-market index simply gives you a very broad lineup of companies across the U.S. stock market.
Total-market funds and index funds don’t need a team of analysts to do research or determine when to buy and sell. They are passively managed. That’s why these funds have much lower fees than other types of funds.
I wish we had known about them sooner because they made me question whether paying more for expertise was worth it.
THE PROBLEM WITH PAYING MORE FOR ACTIVE MANAGEMENT
Actively managed funds, where a team of experts is actively analyzing, buying, and selling stocks, charge fees. These fees are a percentage of your total investment.
The percentage amount can be found by checking out the fund’s expense ratio, which will be listed as a percentage. For example, an actively managed fund with a 0.5% expense ratio would cost you $5 per year for every $1,000 invested.
That might seem insignificant, but just like inflation, these small numbers can hurt you big time in the long run. Every dollar you pay each year in fees could have compounded into a much larger amount down the road. Even a 0.5% fee could mean giving up hundreds of thousands of dollars in the future.
And here’s the kicker—over the long run, many actively managed funds fail to beat the index they’re trying to outperform. In fact, 79% of actively managed large-cap U.S. equity funds underperformed the S&P 500 in 2025.
Passively managed funds still charge fees, but those fees can be much lower than the fees charged by actively managed funds. So in the long run, index funds can let you keep more of your money AND potentialy deliver better results.
WHAT IS AN EXCHANGE-TRADED FUND (ETF)?
For the longest time, ETFs weren’t a consideration for our portfolio. It wasn’t that they were bad; I simply didn’t understand what they were.
Once I did, though, they became a part of our investing strategy. They are surprisingly simple.
Most ETFs are passively managed index funds. Just like there are mutual funds that mirror the S&P 500 index or the total market, there are also ETFs that do the same.
Likewise, ETFs offer diversification and low fees. For all intents and purposes, ETFs are just like their mutual fund equivalents, but they also come with a few advantages.
WHY I PREFER ETFS
One big advantage of ETFs is that they are traded on stock exchanges, so you buy and sell them through a brokerage account just like you would an individual stock. Just like stocks, ETFs trade throughout the day at market prices.
Mutual funds work differently. You buy and sell shares through the fund or an intermediary. The share price is calculated once per business day, typically after the stock market closes. That's when your mutual fund purchase or sale is processed at the calculated share price.
But wait, there’s more!
ETFs can also be more tax-efficient than comparable mutual funds when held in a taxable account. Note: That tax advantage doesn't matter inside tax-advantaged accounts like a 401(k) or IRA.
ETFs also tend to have lower expense ratios than comparable mutual funds. This includes total-market funds and index funds.
An index mutual fund and an index ETF that both track the S&P 500 will generally hold very similar investments.
If I'm choosing between two funds that give me essentially the same exposure, I'll look closely at the costs—and in a taxable account, the potential tax efficiency.
HOW I’D INVEST MY FIRST $2,000 TODAY
When we first started investing, our portfolio consisted of mostly growth and income mutual funds.
We didn’t understand what growth funds were, but someone told us we needed to have growth. And as for income funds, we were attracted to the word “income.”
We had no idea what we were buying or paying for.
If I had a time machine and could have a redo, I would have kept things really simple.
I wouldn’t have bothered with growth or income funds. Because if fund managers can’t beat the index, then I’d just buy the index.
I’d look for a low-cost index fund that tracked the S&P 500 or a total-market index and compare expense ratios. And if I had the choice between a mutual fund and a comparable ETF in a taxable brokerage account, I'd take a close look at the ETF's costs and tax efficiency.
Most importantly, I'd make sure I actually understood what I was buying.
That might sound obvious, but it wasn't obvious to us. We invested in funds because someone recommended them to us. We didn't know what the funds owned, how much they cost, or whether we were getting our money's worth.
We eventually figured it out. And despite our early mistakes, we still managed to retire before 50.
But if I could give my younger self one piece of investing advice, it would be this:
Don't invest in something just because it sounds good. Understand what you own, what it costs, and why you own it.
Because FIRE is about making smart money choices and not simply hoping for the best.
See you at the finish line!
Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.
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