Monday, November 30, 2009

The Importance of Starting Young

A friend recently told me that his daughter, in her mid-20s, wasn't thinking much about saving or investing now, but thought this was something to start thinking about in 5 years or so.  This brought to mind the many illustrations I've seen about the importance of starting to save and invest as early in life as possible.  Starting just a few years earlier can have a dramatic impact on how much money one ends up with when they retire.

Sunday, November 29, 2009

Investment Account Basics

In my Facebook note version of this article, someone asked the following questions with regard to the investments I've been discussing:

  1. Can you pull your money out at any time?
  2. If so, do you have to pull out all of your money or can you pull out certain amounts still? I'm guessing as long at the minimum investment is still there you can pull out some I right?
  3. Do people invest in these funds for more of a long-term investment vs short-term?

For the answers, read on ...

Investing in Emerging Markets

In my Facebook note version of my previous article, someone asked for my take on investing in emerging markets. Here it is.

The short answer is that emerging markets make up a useful asset class to include in a well diversified portfolio, but I wouldn't recommend speculating on whether they're going up or down in the short term. I'd recommend holding emerging markets in something approximating their market weight; I'll expand on what that means if you read more.

What is a low cost index fund?

I started writing these articles as Facebook notes, so am copying those to here.  In a comment to my first investing note (on facebook), someone asked what a low cost index fund is.

An index fund is a mutual fund that attempts to track an index. So, first we have to define mutual fund and index.  Then I'll get into the cost aspects.

Please read on if interested ...

Low Cost Index Funds are the Way to Go for Most People

This blog is intended mainly for family and friends who want (or need) to learn more about investing. If people outside of that circle find it interesting or useful, then great.

To get things rolling, I'll mention that I'm a big fan of using low cost index funds as the core of an investment strategy. Academic research has shown that low costs are the best predictor of long term performance, and that it's highly unlikely that you'll be able to "beat the market". Therefore, the winning long term strategy is simply to own the market at the lowest cost. Note that by "the market", I don't mean just stocks (stock funds), but also bonds (bond funds).

Vanguard has the broadest selection of low cost index funds, but Fidelity and Schwab offer a few stock index funds with comparable or even lower costs.

Especially for someone just getting started with a small amount of money, Schwab is good, since their minimum investment for their index funds is only $100 (Vanguard's minimum is $3000), and their fees (expense ratios) are competitive. My 15 year old daughter Alyssa has been investing much of her allowance in a couple of the Schwab funds (Total Stock Market Index and International Index). Schwab has also just come out with some ETFs (Exchange Traded Funds) that you can buy and sell with no commission in your Schwab account.

For those with more money, and who want to use one vendor, I recommend Vanguard, since they have a better selection of lower cost bond funds than either Fidelity or Schwab (or any other financial institution I know of), as well as a broader selection of low cost stock index funds (value, small, small value, REIT, etc.). This allows you to assemble a more diversified, low cost portfolio.