Index Funds?

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[quote]nephorm wrote:
I do have to argue with one point: that the younger you are the more aggressive you should be with your investments. While I think this is true once you start making a steady income, I don’t know that it is when you’re just finishing highschool and have very little money to begin with.

Look at it this way: $1500 is a LOT of money for most 18 year olds. $1500 is not so much when you start making a steady paycheck; not that it’s a small sum, but it is more easily replaceable. When you invest money at that age, you are giving up the use of a proportionately more important amount of money. In other words, you’re giving up money now (when you need it) to have that money in the future, when you’ll need it less.

Rationally, of course, you could make the argument that in that case, since you’re giving up the use of the money anyway, it might as well go into the highest-risk, highest payout investments possible. The potential for it to yield large dividends in time for him to start a job and maybe buy a house, etc.

In someone that young, however, I’d really prefer to build the habit of saving and investing, rather than worry so much about getting big returns. After all, if he loses his money in four years (a definite possibility with high-risk investments), it could sour him on investing in the future. After all, it would seem like the money was lost for no reason.

Instead, I really suggest investing in something like the Vanguard Total Stock Market Index. Reasonable returns, low fees… and you can earmark the money for a vacation or whatever you want after you graduate college. It’s also a great starting long-term investment.[/quote]

I think you’re correct in that I don’t think age has anything to do with it – it’s the time horizon of when you think you would use the money.

From these posts, I’d say the assumption should be that he would use the money on a house down payment within 5-10 years, which would argue for a somewhat conservative mix of stocks and bonds – say 60/40 stocks/bonds, with stock 50/50 between U.S. and international total index ETFs and bonds with some broad bonds and some in TIPS, say 80/20 broad to TIPS.

Also, interestingly, there has been some academic focus recently on whether it makes sense to take big risks early on even in a long term investment – the idea being that, much as the small gains get bigger over time because of compounding, a large setback in the first five years could really hurt long-term returns.

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[quote]ec_fritz wrote:
If I had known what I know now when I was your age I definitly would have gotten into an index fund. As you learn more about investing you can start getting more diversifed with some higher risk investments, but for now just get into an index fund and get into the habit of putting money into it every month.[/quote]

Index funds are definitely the way to go – they’re more tax efficient, have lower costs and generally track the market.

I would say for the amount he has he should get ETFs vs. mutual funds – ETFs tend to have even lower costs than funds, though only by a fraction of a percent, and they have no investment minimums.

For diversification, remember it’s important to diversify within the category, which is what a mutual fund/ETF gives you for stocks, for example, and among categories, i.e. between stocks and bonds, as a basic diversification, or between U.S. and international markets.

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[quote]DION88 wrote:
to anyone who knows wha are some of the differences between the " Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)" and the “Vanguard 500 Index Fund Investor Shares (VFINX)”. I was reading about them both on their website but the window closed and I am unable to open it back up.[/quote]

Look them up on Yahoo Finance or on some similar site – that will give you a good breakdown.

Here are the links for the two you are looking at:

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Thanks BB

Actually I was asking about the VTSMX not the VTMSX but I just typed in the right one and got the info. so I am comparing both and they seem to be very similar they both need the same initial investment and the annual return rate are around the same (VTSMX)wins out by a bit, it has a better rating but it is also riskier. How does one choose? what does one look for.

A question I do have is why although they have the same initial investment why is the price for one 130 $ and for the other 33$ what does that mean?

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[quote]DION88 wrote:
Thanks BB

Actually I was asking about the VTSMX not the VTMSX but I just typed in the right one and got the info. so I am comparing both and they seem to be very similar they both need the same initial investment and the annual return rate are around the same (VTSMX)wins out by a bit, it has a better rating but it is also riskier. How does one choose? what does one look for. [/quote]

You’re basically choosing based on your risk profile. If you’re only going to get one fund, I would suggest going with the VTSMX, as it is more diverse – you get some small-cap exposure as well as the large-cap you get from the S&P 500, but it’s still weighted toward large-caps.

Here’s what the summary info is on the VTSMX:

The investment seeks to track the performance of a benchmark index that measures the investment return of the overall stock market. The fund employs a passive management strategy designed to track the performance of the MSCI US Broad Market index, which consists of all the U.S. common stocks traded regularly on the NYSE, AMEX, or OTC markets. It typically invests substantially all of assets in the 1,300 largest stocks in its target index, thus covering nearly 95% of the Index’s total market capitalization.

Here is the summary on the VFINX:

The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the Standard & Poor’s 500 index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. It invests all, or substantially all, of assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

[quote]DION88 wrote:
A question I do have is why although they have the same initial investment why is the price for one 130 $ and for the other 33$ what does that mean?[/quote]

With mutual funds, that is the NAV – the Net Asset Value – or the value at the end of the trading day of the entire mutual fund’s holdings, minus liabilities, divided by the number of shares of the fund outstanding. However, note that the market value is often less than the actual value – but not so much for index funds. That’s complicated, but just think of it as the “share price” of the mutual fund – but remember that it’s only re-set once per day.

Here’s a link to a set of definitions for NAV: Answers - The Most Trusted Place for Answering Life's Questions

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Thats what I was going to ask is it just like a stock share price? so when you add to the fund do you buy say 10 shares or is it more like a Ira where you can add say 1000 dollars a month?

Also I have been reading through some sites like motely fool and they read that it is somewhat better to buy a fund through a brokerage because you can sell easily and buy other funds like the wilshire 5000. Is this true?
because vanguard offers a brokerage account where you can by stocks.

I guess what I am saying is, is it better to buy funds straight from the companies and having a seperate brokerage account for stocks from say ameritrade or is having both the funds and the brokerage accounts in the same place like vanguard better?

Sorry if I asked these questions but searching through the internet is all I have and it is pretty difficult. No one in my family is familiar with any of this.

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He seems to have hit the nail right on the head:

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[quote]SwampThing wrote:
Yeah when your young its best to go with High Risk/ High growth. The premis being that you really have nothing to lose.[/quote]

The first two years of an IRA investment, in my opinion, should be in index funds or depending on the etf an etf, then you can pursue a high risk portfolio, but continual purchases should be made of the base of the portfolio just to factor in dollar cost averaging.

[quote]HOV wrote:
It’s a good staple for a retirement type account like IRA or 401K.[/quote]

I disagree. When forming the base of your retirement plan it’s always good to have the money in the most solid investments possible, but there comes a time when you’re making more than you can max out in both an IRA or a 401k (probably several years for the kid, since he’s still young) and then tax becomes a concern, and that’s when you start putting the volatile shit in your tax deferred account.

[quote]DION88 wrote:
I guess what I am saying is, is it better to buy funds straight from the companies and having a seperate brokerage account for stocks from say ameritrade or is having both the funds and the brokerage accounts in the same place like vanguard better?
[/quote]

Yes and no. I opened my IRA with Vanguard because I knew my first 2-3 years of investing would be purely in their most reliable funds. If you want to from there you can move it to another brokerage while continuing to buy Vanguard stock. I don’t think that’s going to become a concern of yours for a while.

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You’ll need to read up on the brokerage accounts to see what the fees are. As you’re investing a small amount, you won’t qualify for any fee waivers.

Pay attention to whether the accounts will level an “inactivity” fee – companies like E-trade and Ameritrade did that previously.

Ideally, what you want is a combination of the lowest trading cost and no inactivity fee. For peace of mind, I would stick to a broker you’ve heard of. You might try Charles Schwab – they have a decent reputation. My only experience with them has been good – they run my firm’s 401(k) plan.

Also, per my posting above, I would still recommend getting three ETFs rather than one mutual fund – get a U.S. broad-market ETF, an international broad-market ETF, and a bond ETF.

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I was wondering why people were mentioning the amount of money I had. The 1500 was hypothetical I myself have around 5000 dollars to invest dont know if that changes anything.

I have been looking through a couple a brokerages and was wondering if I would be able to buy vanguard ETF’S from another brokerage. I ask because on their site it says “Vanguard ETFs are available only through brokerage firms like Vanguard Brokerage Services?.”

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[quote]DION88 wrote:
I was wondering why people were mentioning the amount of money I had. The 1500 was hypothetical I myself have around 5000 dollars to invest dont know if that changes anything.

I have been looking through a couple a brokerages and was wondering if I would be able to buy vanguard ETF’S from another brokerage. I ask because on their site it says “Vanguard ETFs are available only through brokerage firms like Vanguard Brokerage Services?.”
[/quote]

You should be able to buy any publicly traded stock, ETF or fund from any broker. I hold all my Vanguard funds and ETFs through a non-Vanguard account. Just pay attention to costs and pick a firm that you trust – for me, I added the criterion of not picking any brokerage house that hired people to cold-call me on stocks…

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A question regarding brokerages most brokerages have account minimums of 2000 dollars, index funds usually run for 3000. Would this cover it or are they two different things.

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[quote]DION88 wrote:
A question regarding brokerages most brokerages have account minimums of 2000 dollars, index funds usually run for 3000. Would this cover it or are they two different things. [/quote]

They are two separate things. The brokerage requires a minimum cash amount in the account to open it. Then, the mutual funds have a minimum initial investment amount. So you could open your brokerage account with $5000 and invest $3000 in one mutual fund with a $3000 initial investment, but then you would not have enough to invest in another mutual fund with a $3000 minimum. ETFs are better that way, in that the minimum investment is the cost of one share. They also have as low or lower costs than mutual funds.

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Thus far all of this information has been very helpful. Thanks you everyone.

However I am still a bit confused with the NAV of the index funds and ETF’s. Intially you invest 3000 dollars into most index funds, after that do you buy shares as if it were a regular stock? the VTSMX has a NAV of 34.29 is that the price of one share? If so I still dont understand why although the VFINX and the VTSMX are both large blend and have the same initial investment, the VFINX has a much higher NAV(131.17)

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[quote]DION88 wrote:
Thus far all of this information has been very helpful. Thanks you everyone.

However I am still a bit confused with the NAV of the index funds and ETF’s. Intially you invest 3000 dollars into most index funds, after that do you buy shares as if it were a regular stock? the VTSMX has a NAV of 34.29 is that the price of one share? If so I still dont understand why although the VFINX and the VTSMX are both large blend and have the same initial investment, the VFINX has a much higher NAV(131.17)[/quote]

It’s essentially a share price – your initial investment in an index fund buys you a certain number of shares - the minimum of $3000 is just an arbitrary amount set by the fund, and it differs among funds. And remember, a share price is supposed to reflect the price for one unit of a fund – so if one fund has more total holdings or fewer units outstanding, it will affect the share price.

Read this – it’s helpful too: http://www.sec.gov/answers/mutfund.htm

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Thanks BB that link was helpful.

As I was looking through some brokerages I noticed that there was no mention of an inactivity fee, is it the same as a maintainance fee?

Also would you know what the default rate on cash % is, is it even important?

lastly when looking over purchase info of the funds. Funds list the initial investment for the fund, IRA, and AIP. Mujst you invest in all?

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why are commision prices for funds higher thanb the share prices themselves?