Monday, September 6, 2010

Investing 101: Index Funds

Broad Street with the New York Stock Exchange ...Image via Wikipedia
If your thinking about getting into investing and want an easy way to get your feet wet why not try Index Funds. We all have the common problem of which of the 3000 plus mutual funds do we put are money in. You can search for the hot fund or the fund with the great long term track record. But when you purchased it, it tanked. What to do? I would just like to pick a fund that will let me get some sleep at night!
The answer for you is Index Funds. Jack Bogle founder of Vanguard Funds and pioneer of index funds says," Why look for a needle in a haystack when you can buy the whole haystack." Get great diversification by buying everything. You will ride the markets ups and downs like a roller coaster. But always with a upward trend. You will be at ease in your choice of index funds because you won't have second thoughts. How can you? You own everything, you don't have to believe you have the wrong stock or fund, you own them all. Another plus for your index portfolio is, by not buying and selling a lot you'll save all those transaction fees. Also buying from Vanguard, there will be none if you buy their mutual funds directly.
Now what do you do to get started? What funds to buy? Start with the basic three with percentage allocations:
  • Total Stock Market Index Fund. 60%
  • Total International Market Index Fund. 30%
  • Total Bond Market Index Fund. 10%
This is a good place to start. Your allocations can be adjusted based on years till retirement. There are many other index funds to add to this list for further diversification. There are TIPS, Small-Cap,Specialty Foreign, REITs and others. As your portfolio increases new money can be put here. To get some good advice study the work of John Bogle. He's the main source to go to. Others like Paul Merriman on his web site Fundadvice.com. He offers his own proprietary work on index funds including his "Ultimate Buy an Hold Strategy". He offers sample index fund portfolios. He also produces many educational videos on investing. His active web site keeps you going back for more good advice. Also Paul Farrel over at Marketwatch.com keeps a scoreboard of the top eight index fund portfolios. He has there performance over the last 10 years and its updated daily. You'll also enjoy his "Andy Rooney" style commentary's. He is many years experience in the equity markets and writes a thoughtful column. Here's a list of the Index Fund Portfolios Courtesy of Paul Farrel's column at Marketwatch.com.
Take the strain and worry of investing away with index funds. Open an account Or if you have one see if you can purchase them there. If you go to Vanguard Funds there is a minimum investment of $3000. At Schwab their index funds have a minimum of $100. You can start there and latter move to the mother ship Vanguard. To be sure you will be saving money because a nice feature of these index funds is the low expense fees. Vanguards Total Stock Market Index Fund has an expense ratio of  0.18%. One of the lowest. But be careful because I have seen some expense fees as high as 1.5%. There is no reason for these high fees.


4 comments:

  1. Good advice. I'm a fan a Merriman and the lazy portfolios, but don't care for Paul Farrel's commentaries very much. The mutual fund industry is great at figuring out ways to separate you from your money. It is what they live for, not growing your portfolio like you might think. It has been proven time and time again that for the average investor the best predictor of future performance is cost, and index funds are without question the lowest cost funds out there, especially Vanguard and Schawb.

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  3. Hey Dave, I'm a high school senior at Singapore American School taking a personal finance class with Andrew Hallam, you may have heard of him; He is the author of Millionaire Teacher: The nine rules of wealth you should have learned in school. And just yesterday we were having a discussion about whether it is better to try and predict the hot mutual fund which could potentially have a higher return vs an index fun like the S & P 500 which is a really good way to diversify your money. Would you recommend putting money into different index funds as a further measure to diversify your money?

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  4. You have yourself a great teacher. I am reading his book at the moment and will soon write a review of it for my website. My advice to you is not to try and predict the next hot anything. Index funds are the best advice I could give you for investing. A smarter man than me that knows all about index funds is Paul Merriman. He has built a diversifies portfolio of index funds. His website Fundadvice.com has a really solid portfolio of index funds plus a lot of good info. why index funds are a good investment. Best of luck to a young investor.

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