Getting Started

[thunderb4ll]

Hello everyone,

After several years of procrastination, I have finally decided it is time to invest my savings. I have done a bit of research, and it seems as though index funds are a great way to get started.

I am in my early 20's (college student) and am prepared to invest $15-20k. The money is not needed anytime soon, and I simply want it to grow as much as possible. Based on my findings, the funds that seem to be the most appealing/popular include:

• VFINX (500 Index)
• VTSMX (Total Stock Market Index)
• VGTSX (Total International Stock Index)
• VFIFX (Target Retirement 2050 Fund)

I believe my parents have investments with American Funds (via Edward Jones), so I could conveniently go that route. However, I have heard great things about Vanguard and the no-load index funds, so I thought I would entertain the idea of going with Vanguard.

Are the above good picks? I was considering having my money distributed between VTSMX (or VFINX) and VGTSX (85/15 split perhaps) or simply putting all of it into VFIFX. Any reaons for picking VFINX over VTSMX or vice versa?

At this point, I am guessing my best bet is to open a Roth IRA. I understand that there is a max limit as to the amount I can contribute annually to the Roth account ($5k?). Would I best off contributing the max to one of the above (say VTSMX or VFIFX) this year followed by the max contribution next year into the same fund or perhaps another (if I decide not to go with VFIFX)?

Thanks very much for all the advice/information.

[noppenbd]

Vanguard is a great place to have your money because the fees are so low, and because they are basically investor-owned. Most mutual funds have a conflict of interest because the fund house makes more money when they charge higher fees and pull in more investment dollars, both of which hurt individual performance.

That said, the problem with Vanguard is the minimums can be tricky when you are just starting out. Most funds have a $3K minimum. To get around this you could start out with the VFIFX as you mentioned. If you max out your Roth the first two years, this problem will go away after year 2.

The other option is to open a brokerage Roth account at a low cost provider (Scotttrade, eTrade, etc), and buy ETFs instead of mutual funds. ETFs are in many respects similar to mutual funds. There is an ETF equivalent for VTSMX (VTI) while SPY is similar to VFINX. To approximate VGTSX you could use a 5:1 ratio of VEA and VWO ($5000 in VEA and $1000 in VWO for example).

ETFs are traded like stocks so you will pay a commission each time you buy and sell. However, the expense ratios are usually lower than their equivalent mutual funds so you will come out ahead if you don't trade a lot. If you are investing a small amount each month then ETFs are not going to be a good deal for you.

[jIM_Ohio]

VFINX and VGTSX are nearly identical.

I know one holds 500 stocks and one holds 5000+ stocks, but don't let the numbers fool you- when the 500 go up, the 5000 will go up too (75% of the total stock market is the S&P 500).

Look up the extended market index- that fund holds the wilshire 5000 MINUS the S&P 500 and is a better small/mid cap choice, IMO. Then a 75-25 or 65-35 split should be considered (85-15 split would be the same thing as VGTSX as 100% holding).

Check my math by doing an xray of the fund combinations on a portfolio worth $20,000.

[noppenbd]

VFINX and VGTSX are nearly identical.

I think he means VFINX and VTSMX are nearly identical.

And yes, they will move together, although VTSMX, with a small amount of small cap exposure, will be slightly more volatile (and have theoretically greater return over time). Ten year returns show this: VTSMX is up 4.89% since Jan 1999, VFINX is down 1.47% (sad, huh?).

[thunderb4ll]

Thanks for the replies.

That said, the problem with Vanguard is the minimums can be tricky when you are just starting out. Most funds have a $3K minimum. To get around this you could start out with the VFIFX as you mentioned. If you max out your Roth the first two years, this problem will go away after year 2.

I do not understand what the problem is. The funds I mentioned have an initial minium of $3k and the max I can contribute to a Roth IRA this year is $5k (above the fund minimum). I must be missing something here...

Also, any other comments before I decide to bite the bullet? Is the account opening process fairly smooth with Vanguard?

Thanks again everyone.

[kork13]

if you have all $5k of that all at once (many people invest over time) and are only putting it in 1 MF (generally doesn't allow for much of an asset allocation), then that's great.

Those are the two major "problems" about vanguard's minimums, because it is a minimum for EACH fund you get into. Now, given that you're looking at VFIFX, VGTSX, and VGTSX, (a retirement fund which is built with an allocation and two total market funds) the latter issue is not really as significant.