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Index Funds for newbies
Drakeon
Registered User regular
Registered User regular
So I've been increasingly interested into starting an index fund for myself, after doing a little research, but not enough to know where to start. So PA, how does one get started with investing in an index fund? Can I do it at a local bank? Do I need to go to an investment group? Any links to helpful sites would also be appreciated. Tried googling it myself and wasn't coming up with a lot.
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Is this fund going to be for retirement through an IRA? Is it just going to be for regular investing? Is it part of an employer's 401k?
These determine where you will start.
Let 'em eat fucking pineapples!
Hmm, probably regular investing or retirement, but I didn't realize they were different TBH. I'll have to give this some thought. Do they typically require a large sum of money to start?
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Your investment goal is very important, it defines the time scale over which you'll be investing and, combined with your tolerance for risk, it will define what asset classes you will select.
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Once you know what you actually want to buy, you can buy shares in an index ETF from any brokerage account. I'm not entirely sure how you go about buying shares in a traditional index fund; I think you will probably need an account of some kind with whatever company is managing the fund. There's usually a minimum investment amount with those as well.
To the OP, I'm not in the States so I don't know anything about Roth investments and such but you really need to figure out your investment timeline, goals and risk tolerance etc as this will affect what you want to invest in. Generally speaking anything stock related including index funds should have a time horizon of at least 5 years possibly even 10+ depending on your risk tolerance. I'll suggest a book called Millionaire Teacher which provides some basics for understanding investing and from what I remember provides some country specific investment portfolios but I don't think it deals with Roth's and such. While Canadian specific the following link also provides some information on index and EFT investing just so you can get some general knowledge of investing and index funds/ETFs to start with.
http://canadiancouchpotato.com/
Please note we are in a bit of an unusual time so while all the sources I mentioned highly recommend balancing your portfolio with bond funds of typically 40% of your portfolios value, whether that is a good idea or not I'm not entirely sure and struggling with myself.
Biggest thing is that however you buy don't let a financial planner basically steal from you. I'm in Canada and the rates, transfer/liquidation fees, holding time minimums are frankly predatory. Its ridiculous to pay even 1-2% of your portfolio forever when the only advice you've ever received was being given a copy of an easily downloadable questionnaire. Granted if you have the need for it a financial adviser (not a glorified salesman that knows less about investing than any decently informed investor) that actually advises you can be worth their weight in gold. I don't personally have the need for one at the moment but may in the future and will most likely use a fee only one as there is much less conflict of interest.
Also if it's specifically for retirement there are different tax-advantaged ways you can set things up, either a traditional IRA or Roth IRA. There will be some hefty penalties (moreso on the former) if you end up needing to withdraw the money before retirement.
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They're good because they're rebalanced for you by computer and so have lower overhead than a lot of other funds, and are generally a fairly safe investment.
You sound like you're looking for general investing guidelines, though...
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Please be defining what you mean by safe.
If you mean safe as in the people running the index tracker will not run off with your money then I agree with you.
If you mean safe in that you won't see the value of your investment half in value in a couple of hours then 2008 is calling and it's saying "Waaaahahomgomgomgfuckfuckfuck".
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
I can't answer because I'm parking your call from the gambler's fallacy, and your order confirmation from the company that makes mason jars for burying your cash out back.
Short term market performance matters a hell of a lot if you're 59. Not if you're 25 and buying things with every intention of forgetting you own them.
Money invested in indexes in 1970 was still delivering retirement level ROIs in 2008. And oddly, index companies tend to be survivors (it's a criteria for index selection) so a person who delayed their retirement for a few additional years because of events in 2008 would now be nearly restored to pre-bubble levels of assets.
Indexes, in safety, are definitely on the conservative slope of the stock risk bell curve.
Worth noting that the some of the most conventionally conservative instruments in the wake of the 2000 tech bubble would have been default swap insured derivatives...would you rather have your money in them or asset rich index companies in 2008? I'll vote with buffet and buy something that owns tangibles.
I host a podcast about movies.
I'm fairly certain we are basically on the same page but I am very averse to the use of the word "safe".
I am absolutely and utterly not saying that you should be putting your cash under the mattress. I am saying that on the risk spectrum for mainstream investments then equities are absolutely the riskiest asset class. As in, on the prospectus document for any Equity index fund the risk category for that fund will be at the highest end of the spectrum. For example, here is Vanguard's UK-All Share Index Tracker http://documents.financialexpress.net/Literature/9979196.pdf on a 7 point scale it's rated a 6 for risk.
This is not to say that you shouldn't invest in equities, quite the opposite, with higher risk comes higher returns and for long term retirement planning you would absolutely have to be invested in equities and my chosen method for doing so would be through index funds (Disclaimer: I am not an investment professional).
But this is why, before investing in anything, you must have an investing goal, time frame and an understanding of your attitude to risk. Because whilst some people are saving for retirement and can postpone retirement to ride out a market dip other people may be investing for other, more time sensitive reasons - say the capital repayment date of their interest only mortgage - and so do not have the flexibility of postponing drawdown of their investment funds. And even for those people who can afford to postpone a few years, what happens if there's a 10 year market dip? It's happened before and there's nothing to say that it can't happen again. Inflation adjusted there have been multi decade periods where the markets have been flat or falling. The nineties saw the most prolonged and extensive bull market in history so 1970 to now still looked rosie even at the bottom of the 2008 nadir, but 1955 to 1985, say, didn't look so hot.
So you are correct that short term-market performance matters not if you are fully intending to hold the investment for 30 years. But. Some people, upon seeing their index fund half in value will panic and pull the money out because they do not have the tolerance for risk that they think they do even though long term the absolute correct thing to do is to keep that investment where it is because it's got another 20 years to recover it's value. And, as they approach their investment goal/end-date then their money needs to be in less volatile asset classes because as you say short term performance matters when you only have a short horizon. For long term investing, especially for retirement investing, you have to have a grasp on the different asset classes and the purpose they serve in building up the target level of funds at the end of your investment period.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
Which is why I asked him if he was really sure he wanted advice on index funds, specifically. If he's just wondering "Hey I'm a young guy just getting some retirement match, where do I stick it" I'd say a vanguard target year fund is basically investing on autopilot.
I host a podcast about movies.
More involved answer: Google for "Bogleheads". Read parts of their wiki. If you have questions, they have a forum (sometimes they're a little skeptical of new folks - they get a lot of "I just found $20 million on the sidewalk and want to invest it so I'm richer than Warren Buffet", but a LOT can be learned just by lurking).
Important advice: Dollar Cost Average (i.e. don't make a single, lump-sum amount) - set up something that will deduct 5% (or something) from each paycheck. In this case, a mutual fund works better than an ETF. If you don't want to do this (maybe you just got a large amount of money and don't have a job), make an investment plan to deduct at regular times (say, every month for N years). The reason is that shortly after you invest, the market will drop (Murphy's Law) - HOWEVER, if you stick with investing for a long period of time, the ups and downs of the market will matter very little, if at all. The important thing is to keep investing in good and bad times, and to stick with a stable plan.
Eh, the concept of Dollar Cost Averaging is probably a more advanced topic than what he's looking for. It might not be all that great either.
Let 'em eat fucking pineapples!