stock index vs. individual stocks?

[disneysteve]

If you don't mind some risk, perhaps a good bond fund would be a better fit for the job.

Bond funds are iffy investments. Individual bonds are better because they have set maturity dates and set interest rates. There is no principal risk if you hold a bond to maturity (unless the issuer defaults).
That said, I do invest in a bond fund because I want to be able to dollar cost average over time. Buying individual bonds requires a lump sum investment.

[investingnoob]

Well i put $10k into an Ally bank savings at 1.75% interest. The money market is 1.70%.

Maybe bonds would be better, I know they have very little risk.
Or mutual funds might be a way to go, I always thought bond and mutuals were practically the same, low returns and low risk.

[disneysteve]

I always thought bond and mutuals were practically the same, low returns and low risk.

"Mutual Fund" is a type of account but there are many different kinds of mutual funds that invest in a variety of types of assets and carry varying degrees of risk. A mutual fund can invest only in US government securities and be ultra-safe or a mutual fund can invest only in highly speculative stocks and be extremely risky or a mutual fund can invest in a blend of assets with a risk level somewhere in between.

[investingnoob]

Ok yea I just found vanguards mutal fund are accounts, which you then get bond, stocks, in it.
I was looking at the Total Bond Market Index

https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT

Low expense ratio and average returns are 5%-7%

[disneysteve]

Ok yea I just found vanguards mutal fund are accounts, which you then get bond, stocks, in it.
I was looking at the Total Bond Market Index

https://personal.vanguard.com/us/funds/snapshot?FundId=0084&FundIntExt=INT

Low expense ratio and average returns are 5%-7%

That is a good fund. I own it myself, but make sure you are looking at the right performance numbers. the CURRENT yield as of 8/28 is 3.63%. Don't look at the historic averages as that is very deceiving.

[investingnoob]

Oh nice, now is that a good 3-5 year short term investment?
Do you just keep adding money to it? is there a limit like IRAs?

Or instead of putting all my money in this one index, should I spread it to other bonds?

[disneysteve]

Oh nice, now is that a good 3-5 year short term investment?
Do you just keep adding money to it? is there a limit like IRAs?

I think a bond fund is a reasonable thing to consider for a 3-5 year time frame. Just understand that it is not without risk. You can lose money, unlike your bank account or a CD that cannot lose money. If you are willing to take that risk, that's fine.

There is no limit to how much you can invest if this is not a retirement account. There is a $3,000 minimum to open the account. Additional investments much be at least $100. There is a $20 annual fee if your balance is less than $10,000. They waive the $20 if you get electronic statements.

[Broken Arrow]

As always, Steve beats me to it.

However, let me add the following. Here is the Vanguard Total Bond Market Fund versus the S&P500.



As you can see, relative to the stock market, the bond market doesn't really move all that much.

But if that's still not "safe enough" for you, there's also Vanguard (short-term) Treasury fund.



Notice how the Treasuries are even more stable than the Total bond market fund?

Of course, as Steve stated, you do have to take on some principle risk with bond funds. However, I maintain that the risk are relatively small (although having only 3 years does up the risk somewhat). And anyways, you do have to take on risk somewhere somehow if you want more than 2% right about now.

[investingnoob]

^ exactly, you guys rock!
The risk in bonds is a risk I'll gladly take any day.
So the VBMFX and mutual funds in general, in say 3-5 years when I need the money for my house, do I just take it out?Is there a penalty for taking your money out before the mature date?
How does the whole "mature date" come into play?
Because on the VBMFX, it says 6.7 years to mature date?

[disneysteve]

So the VBMFX and mutual funds in general, in say 3-5 years when I need the money for my house, do I just take it out?Is there a penalty for taking your money out before the mature date?
How does the whole "mature date" come into play?
Because on the VBMFX, it says 6.7 years to mature date?

When you need the money, you can cash out as much or as little as you want. Keep in mind that each sale of shares is a taxable transaction if this is in a taxable account.

A bond fund like VBMFX does NOT have a maturity date. Only individual bonds have maturity dates. What they mean when they say 6 years is that the average term of the bonds held by the fund is 6 years. Some may mature in 7 years. Others may mature in 3 years. Some may mature next Tuesday. Also, the fund manager could sell bonds in the portfolio before they mature. The average maturity will fluctuate as the holdings fluctuate.

[investingnoob]

great, thank you so much for your time and help I appreciate it!

[Scanner]

As an alternative. . .you may want to consider a Target Fund, since you seem like a newbie to this process.

I am uncomfortable with the idea of you parking your money in a bond fund. . .and let's say it gets 5% for 3 years. . .then, right before you are ready to take it out, the stock market rallies (which often means bonds suffer but not always) and then you get a -5% return nad your mortgage co. is saying, "Hey, where the downpayment you promised?"

A target fund will automatically shift your investments towards cash as you get closer to the target date.

If you knew the exact date of when you would need the money, zero coupon bonds aren't a bad idea except you are paying tax on them and awaiting your interest at the end.

[investingnoob]

Well I have the target fund 2050 right now.
I'm actually thinking I should pay off my car instead of parking my money anywhere else.
My car loan has 11k left on it and I'm paying 5.24% interest...
I don't want to empty my account out, but instead i'm paying it off asap.
Any suggestions?

[Scanner]

Yeah, you would want a Target 2015 at the most. Check the prospectus though as to what the final mix is when it reaches 2015. I would want it to be at least 50% cash.

There are some good number crunchers here (I am not one of them) but I don't beleive in taking all your dough and paying down a loan because then you lose leverage. I would rather send maybe $150-200/month extra in which would knock off a great deal of the term and allow you to retire it early.

There is a point of no return on retiring debt early and usually the extra $100-200/month seems to work well.

[Broken Arrow]

If the money in question is all that the OP has, then I agree that a more comprehensive, diversified portfolio is the way to go.

However, from what I understand, this is only a portion of his money... a saving for buying a house some day. If that is the case, then going 100% into a bond fund isn't a bad idea, especially with a three year horizon.