Index, Mutual, ETF,IRA, Stocks...?

Question

I have a little money to invest (few thousand). I have no 401k and am reading about stocks, index and mutual funds. I think from just reading up on this I prefer now the index over mutual fund.

1. With all the 1000's to choose from which do you pick?

2. Can I withdraw and deposit from an index fund whenever I want?

Which funds are the best?

Answer 1

Starting out in the investing world can be quite intimidating.  You're on the right track looking at index funds.  Here are some things to consider when choosing:

1) Are you investing for the long run (8+ years)?  If so, you should consider index funds that track stock markets as they have higher risk and higher expected returns in the long run.  If you are a short term investor (less than 8 years) you want more bonds as they are less likely to lose money in the short term.

2) Fees.  Minimizing fees is important when choosing the right fund.  Index funds tend to have much lower fees than mutual funds and they range anywhere from 0.2% to 2.0% per year in addition to any purchase costs or sales costs.  In my experience Vanguard has the lowest fees in the industry (usually 0.2% - 0.45% for index funds).

3) Track record.  How has the fund done over the last 10 years (or longer) compared to other similar funds?

4) Minimum investment.  Most funds have a minimum amount you can invest, it typically ranges from $1,000 to $10,000.  This will be important depending on exactly how much you can invest right now.

Some suggestions:

-Vanguard!  They have the lowest fees, a great track record, and they are very user friendly.  I use them for all my investments outside of my work 401k plan.

-ROTH IRA.  I don't know if you're considering this as a retirement account at all, but you should be if you don't have a retirement account started already.  It's pretty clear that the government and most companies won't take care of you in your old age so you'll have to take care of yourself.  The sooner you start, the easier it will be.  The ROTH is the most advantageous retirement investment vehicle for most people.  Read about it here:

https://personal.vanguard.com/us/account...

The basics: Your money grows tax free.  When you withdraw the money in retirement it's tax free.  You can withdraw the money you put in at any time without any taxes or penalties (but it's best to not withdraw the money if possible since this money is for your retirement.)

Even if you don't want this to be a retirement account at this time, you might consider the ROTH IRA since you can withdraw the money you put in (but not the interest you earn) at any time tax free.  In any other account you'll owe taxes.  If you are in an Index Fund without a ROTH IRA you will owe capital gains tax on any interest you earn when you withdraw the money.

Which index fund: Target Retirement Funds.  These are by far the best funds for non-expert investors.  They give you a good amount of risk/reward for your age group, and as you get older they automatically become less risky.  You can just put your money in and never worry about it again (except to add additional money to it).

https://personal.vanguard.com/us/FundsVG...

Choose the date (2010-2050) that is closest to your expected retirement date to see details of the fund.  Each of these funds is invested in several different index funds (S&P 500, bonds, Europe, Pacific) so you will be very diversified, and the fees are extremely low (0.21%)

Best of luck with your investing decisions!