- Can you pull your money out at any time?
- 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 money...am I right?
- Do people invest in these funds for more of a long-term investment vs short-term?
For the answers, read on ...
The answer to question #1 depends on the type of account. For tax advantaged accounts (IRAs, employer sponsored retirement plans like 401k and 403b plans), the answer is more complex. The simple answer is that there are restrictions, and there may be penalties if you pull your money out before reaching retirement age, generally defined as 59 1/2. Since I'm keeping this basic, I'll just say that you should assume that you're putting money into these types of accounts for retirement, and will not be taking it out before then. However, there are exceptions, but discussing them is a topic in itself. We can do that later if there's interest.
For taxable accounts, you generally can pull all or part of your money out at any time. A taxable account is an account that provides no special tax benefits; i.e., you take your after tax money (take home pay) from your paycheck, and deposit it into an individual mutual fund or brokerage account. So, yes, in general you are correct that you can take some of your money out as long as you meet whatever minimums or other account restrictions apply.
Regarding minimums, one thing that's interesting is although Vanguard has a minimum $3000 initial purchase requirement for all of its mutual funds except one (STAR fund has $1000 minimum), once you've purchased the fund, you can sell shares in it ("pull money out of it") and have less than the minimum purchase amount in the fund. For example, we recently did this in on of my daughter's taxable Vanguard account because we wanted to have some money in the Vanguard Prime Money Market fund to be able to exchange into shares of the Total Stock Index fund following a value averaging strategy (to be discussed later if there's interest), but we didn't want to keep $3000 in the money market fund because it's paying such low interest these days (less than 0.2%), while she's getting much higher interest (3.5%) in her rewards checking account. So, we did the initial purchase of $3000 in the money market fund, and then a few days later withdrew most of it and transferred it back to her rewards checking account. We can now transfer as little as $100 into the money market account at any time, and keep $200 or $300 in it to have something there ready to make her next stock fund purchase.
One thing to keep in mind though is that many funds have an early redemption fee or other restrictions to discourage frequent trading; e.g., they may charge you 1% if you redeem shares within 30 or 90 days of purchasing them (the fees and short term holding periods vary from fund to fund). Another thing that Vanguard does to restrict frequent trading is to disallow buying shares of a fund via phone or the web withing 60 days of selling shares in the fund; i.e., you can "pull your money out", you just can't easily put it back in within 60 days. These restrictions and fees apply even if you leave your money in your Vanguard account; i.e., even if you don't "pull it out" of the account. This would be the case if you exchanged money out of one Vanguard fund into another Vanguard fund, but didn't withdraw any money out of your Vanguard account.
These are just examples to illustrate that although you generally can pull your money out of a taxable mutual fund account at any time, there may be some restrictions and fees in doing so.
Generally, there are no such restrictions in a brokerage account; i.e., an account used to buy and sell individual stocks (which I don't recommend for most people) or ETFs (which are similar to mutual funds, but trade like stocks). For example, you can open a Schwab brokerage account with 0 dollars, transfer some money into it a few days later, buy a stock or ETF, sell it a few days later, and pull the money out of the account. Of course, I wouldn't recommend such frequent trading for most people, which leads to answering the 3rd question.
Yes, people invest in the types of funds I've been mentioning for more of a long term investment. You should have savings (money you might need or want to spend within the next year or two) in the highest yielding, safe (ideally FDIC insured) account you can find. Currently, the best deals out there for short term savings are reward checking accounts, which pay 3.5% up to maybe 5%, as long as you meet certain requirements (e.g., make 10-12 debit card purchases, have one automatic deposit or withdrawal, and get only electronic statements -- no paper statements). The next best deals are online savings accounts, which currently are paying about 1.5%-1.8% (check bankrate.com for these).
Money you might need in the next 2-5 years should probably be in a combination of short and intermediate term bond funds or FDIC insured CDs (to the extent they're paying higher interest than a money market or FDIC insured savings account of some sort). Selecting bond funds is another topic, which I'll cover if there's interest. Money you might need in 5-10 years should be in a combination of intermediate term bond funds and stock funds. These are just guidelines; more conservative investors will keep more in cash and shorter term bond funds. Beyond 10 years, your allocation between stock and bond funds depends on your ability, willingness and need to take risk, which is another topic.
Once you've got your savings built up, and are ready to start investing, you want to come up with an asset allocation policy; i.e., what percentage of your portfolio in cash, bonds and stocks, and what percentages in different types of bonds and stocks. Asset allocation is a big topic, so I'll leave that for future notes, if there's interest.
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