You probably know that I'm a big advocate of ETFs, also known as Exchange Traded Funds. You buy an ETF the same way you buy a stock. The difference between an ETF and a stock is that the ETF security itself is a share in any number of individual stocks or other securities. The combination of securities that make up the ETF security gives the ETF it's character. For instance, you can buy an ETF which represents the real estate market, or a basket of bonds or even the S&P500.

In that sense, ETFs are a lot like Mutual Funds. Unlike Mutual Funds however, ETFs are not actively managed. Once the basket of stocks is selected for an ETF, the management job has little to do with stock selection. As a result of not having active management, ETFs feature drastically lower management fees. And that's why I favor them for my investment portfolios.

But ETFs aren't right for everyone. Remember, you buy an ETF like a stock, which means you pay a commission on every purchase and sale. If you're just starting out on your road to financial freedom, you need to pay extra attention to the fees and expenses you'll pay to make your investments. Commissions can really take a bite out of a young portfolio; and that's why for investors just getting up to speed, Mutual Funds may be a better investment choice than ETFs.

To illustrate, an investor just starting out on a regular savings plan with $250 per month to invest might pay between $20 and $25 per year in management fees and other expenses. The same amounts invested in ETFs might result in hundreds of dollars in additional commissions. That's a a big burden on a small portfolio.

Once the portfolio value reaches a certain level it begins to make sense to sell Mutual Funds and invest in Exchange Traded Funds. The general rule is, when management fees and expenses in a Mutual Fund exceed commission costs, it's time to sell the Mutual Fund and buy an Exchange Traded Fund.

My philosophy goes like this: Why should I pay as much as ten times or more for active management of my invested funds when there is a better than even chance I can do better with an investment in an ETF? It just makes sense to use the no-commission to buy feature of Mutual Funds to accumulate a sizable enough investment to enable a cost-advantaged purchase of an ETF.