Index funds for beginners
Member since 2018 · 15 posts · 4 votes
hello everyone first time posting in BiggerPockets, I was listening to the money podcast and Mindy and Scott where talking to a guest about low cost index funds in particular the S&p 500 and vanguard, I’m just cerious if I should set a money limit each month to spend on these two funds every month and how I should go apon doing this, any advice would Be much appreciated. Much love the BiggerPockets community!!!
Read jlcollinsnh.com
Then get a Vanguard account and go VTSAX. Call it a day.
Interesting you should recommend VTSAX, it's equivalent to the VTI fund I recommended and raises another question: which is preferable an ETF or a mutual fund? There are plusses and minuses with each. Consider the following choices from Vanguard:
VTSAX - Total Stock Market Index - Mutual Fund Admiral Shares
VTSMX - Total Stock Market Index - Mutual Fund Investor Shares
VTI - Total Stock Market Index - Exchange Traded Fund
These are all the same exact product just sold to you in different ways. In fact, if you go to the annual statement for any of these, it will lead you to the same exact document. So which is best for you? First let's see expenses and minimum investments:
Annual Expense Charge (as a % of invested funds)
VTSAX = 0.04%
VTSMX = 0.15%
VTI = 0.04%
Minimum Investment
VTSAX = $10,000
VTSMX = $3,000
VTI = 1 share = $137
Given this is the same exact product, I would never buy VTSMX because with its higher expense you are guaranteed to get a lower return (0.11%) than both VTI and VTSAX. This higher expense can be seen in the 10-year return for each product:
10 Year Average Return
VTSAX = 8.72%
VTSMX = 8.60%
VTI = 8.72%
So now you have two to choose from, VTI and VTSAX. If you don't have $10,000 minimum the choice is easy, only VTI is available. Otherwise it comes down to whether you prefer mutual funds or exchange traded funds (ETFs).
For me, I like ETFs because they can be sold instantaneously during market hours, this has the advantage of letting you know exactly how much you are paying or receiving for a trade. In contrast, to buy/sell a mutual fund you must put the request in prior to market close and then the price is determined based on the market close price. This means if you want to know approximately what you will pay/get you need to decide minutes before market close and hope pricing doesn't move too much.
The advantage of mutual funds is the quicker availability of funds. If you sell an ETF on Monday you must wait until Wednesday to be able to access the money. For mutual funds, the money from a Monday sale would be available on Tuesday.
Here's a good summary of the trading differences between ETFs and Mutual Funds:
https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs
Austin.
That's really going to depend on your personal finances.
The more that you can save and put away the better. So for me I invest everything that I don't spend on a monthly basis. If you can figure out a baseline number each month then that is what I would do.
Check out the book The 3% Signal by Jason Kelly. If you follow it, its an easy set it and forget it philosophy. You just pick what you want to contribute and make 4 trades a year. You could do it on your own of through your 401k.
Austin, I think it is a good idea to treat contributing to your savings/investments as a mandatory thing rather than something optional that you will do "when you have enough money". It creates good financial discipline for you, and will quickly build up your net worth.
@Austin Mize Unless you don't have a sizable (> $5-10M portfolio), you should stick with investing through low-cost index funds or ETFs.
Vanguard has excellent resources (below) that you should look into:
As @Brian Schmelzlen mentions, treat your investments as mandatory (i.e. pay yourself first) rather than an optional exercise.
Ideally, you should match your liquidity with long-term needs. Hence, investing all your money into RE might not be the best way as you would like a combination of liquidity management with long-term wealth creation.
Best of luck!
1. Open up two accounts with an online trader such as TDAmeritrade. One account should be tax optimized like a Roth IRA. The other account should be a normal trading account. (If you have kids you can do educational account too.)
2. Maximize any tax advantaged accounts first, so you hit the maximum annual contribution amount. The reason you want to do this is because taxes are your largest expense. Money in a Roth IRA is taxed before it goes in and is withdrawn in the future tax free!
3. Take extra money and put it into your non-tax advantaged account. You will pay taxes on this money when you withdraw it. If you retire early, this is the account you withdraw from because retirement accounts have age restrictions.
4. As far as what to invest in, something simple like VTI is a whole market fund. Since you own a piece of the whole market, you are industry diversified. Since the companies owned by VTI do much of their business overseas, you are globally diversified.
5. Don't try to time the market. Put the same amount in every month and ride the highs and lows. Avoid the temptation to take your money out when the market goes low, because you want to be invested for the upswing that follows.
@Austin Mize - Vanguard is a great way to go! I would recommend reading Jim Collins' Simple Path to Wealth. It's a great book and shows how over time you can really increase your net worth by passively investing in index funds.
I would recommend keeping a buffer in a checking/savings account for immediate use, but investing any other savings into an index fund. Whether that is to keep there forever or until you save up to buy the next property.
This is a "me too" post where I'm just adding intensity. I did everything mentioned above and saw my net worth accumulate over time. My only regret is that I didn't start 20 years sooner.
@Austin Mize If you're not going to use the transaction-free ETFs offered by TDAmeritrade, I'd recommend against that platform. If your trade amounts are not high, the higher commissions will eat into your returns. If you're going to stick with commission-free ETFs, it shouldn't make a difference.
I might get some flack for this, but I also don't necessarily recommend opening an IRA or a Roth IRA. It really depends on what your goals are. I know people who invest, or plan to invest, in index funds until they have enough money for a down payment on real estate. If you put your money into an IRA you get hit with a penalty if you withdraw it (and taxes if it's an IRA and not a Roth IRA); and if you don't withdraw it, I think you will be taxed on it as ordinary income once you withdraw and lose out on the tax benefits of investing in real estate. Full knowledge of your income/net worth and your age would be important for this analysis - you should discuss the different options with a qualified tax planner (your CPA).
But I strongly follow everyone's recommendation that you should get started saving and investing. The sooner your start, the sooner you kick off the power of compounding.
If you don't have a lot of money to invest every month and don't want the little money you are trying to invest get eaten by trading fees(even though they are usually less than $10/trade), I recommend using the Robinhood app. It doesn't charge any trading fees so you could set up a monthly purchase of the same index fund. It also doesn't give you much research info.
The link above is to their website. I would also recommend you search "Robinhood app reviews" to learn more.
Read jlcollinsnh.com
Then get a Vanguard account and go VTSAX. Call it a day.
It is more sophisticated than just buying SPY. The positive side is few professional traders can beat the results. The minus side is Sp400, SP300, SP100 etc performs even better.
However since the first part of 2018 it is essentially a wash and we know the economy is strong at least through 2018.
Some investor start with a Roth IRA and they were able to buy and flip home eventually with Roth to avoid a hefty capital gain. The earlier one starts an IRA invest in equity the more one will able to enjoy later. These heckers often lose more than they make. Not everyone has 135 properties at the age of 25. Most will brag more than they admit they got into a bad deal and lost it all.
I would add that if you're looking to invest in both real estate AND stocks (making this assumption seeing as this is primarily an REI site), it might benefit you to look into an ETF that pays high dividends such as Vanguard High Dividend Yield ETF (NYSEMKT:VYM) and SPDR S&P Dividend ETF(NYSEMKT:SDY). Dividends can benefit you greatly if you're also investing or have the long term goal of investing in real estate because lenders consider dividend income which helps you qualify for bigger loans on property (with the caveat that you need minimum 2 years of dividend income history before they will consider it). VYM and SDY are both high yield (about 30% higher than an average index fund), but they're quite different. Vanguard's dividend ETF is basically a collection of the highest dividend paying companies from the very top of the list while SPDR S&P Dividend ETF is a collection of "Aristocrat" companies. I prefer SPDR's dividend ETF for various reasons but do your own research. 3.2% yield, 11% annualized returns over last 10 yrs, owning a little piece of world's greatest companies, padding your income in case you have a slow period at the day job or no W2 income at all, can't go wrong! Additionally if your goal is passive income, dividend stocks are the holy grail, forget about real estate altogether and skip right to collecting "Aristocrat" stocks.
Read jlcollinsnh.com
Then get a Vanguard account and go VTSAX. Call it a day.
Interesting you should recommend VTSAX, it's equivalent to the VTI fund I recommended and raises another question: which is preferable an ETF or a mutual fund? There are plusses and minuses with each. Consider the following choices from Vanguard:
VTSAX - Total Stock Market Index - Mutual Fund Admiral Shares
VTSMX - Total Stock Market Index - Mutual Fund Investor Shares
VTI - Total Stock Market Index - Exchange Traded Fund
These are all the same exact product just sold to you in different ways. In fact, if you go to the annual statement for any of these, it will lead you to the same exact document. So which is best for you? First let's see expenses and minimum investments:
Annual Expense Charge (as a % of invested funds)
VTSAX = 0.04%
VTSMX = 0.15%
VTI = 0.04%
Minimum Investment
VTSAX = $10,000
VTSMX = $3,000
VTI = 1 share = $137
Given this is the same exact product, I would never buy VTSMX because with its higher expense you are guaranteed to get a lower return (0.11%) than both VTI and VTSAX. This higher expense can be seen in the 10-year return for each product:
10 Year Average Return
VTSAX = 8.72%
VTSMX = 8.60%
VTI = 8.72%
So now you have two to choose from, VTI and VTSAX. If you don't have $10,000 minimum the choice is easy, only VTI is available. Otherwise it comes down to whether you prefer mutual funds or exchange traded funds (ETFs).
For me, I like ETFs because they can be sold instantaneously during market hours, this has the advantage of letting you know exactly how much you are paying or receiving for a trade. In contrast, to buy/sell a mutual fund you must put the request in prior to market close and then the price is determined based on the market close price. This means if you want to know approximately what you will pay/get you need to decide minutes before market close and hope pricing doesn't move too much.
The advantage of mutual funds is the quicker availability of funds. If you sell an ETF on Monday you must wait until Wednesday to be able to access the money. For mutual funds, the money from a Monday sale would be available on Tuesday.
Here's a good summary of the trading differences between ETFs and Mutual Funds:
https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs
Additionally if your goal is passive income, dividend stocks are the holy grail, forget about real estate altogether and skip right to collecting "Aristocrat" stocks.
I'm using this same approach of investing in Dividend Aristocrats. I bought individual stocks in a Roth IRA and set them up as DRIPs. Much more capital is needed when purchasing individual stocks than when purchasing a fund of dividend-paying stocks.
The advantage, however, is the dividend growth aspect. My go-to strategy is to find proven dividend payers that grow their dividends by 10% or more per share per year. Using the Rule of 72, this means the dividends double every 7 years. A dividend of $1 today becomes $2 seven years from now, $4 fourteen years from now, and $8 twenty-one years from now (assuming the companies continue to grow their dividends over the next two decades).
I started by finding the stocks that were on both the DJIA and Dividend Aristocrats lists (the seven I came up with are JNJ, KO, MCD, MMM, PG, XOM, and WMT). I now have around two dozen dividend growers in the portfolio, with most of these on the Dividend Aristocrats list (at least 25 years of growing dividends). The remaining stocks are on the Dividend Achievers list (at least 10 years of growing dividends). I have to keep GE in mind, which has been paying dividends for over 100 years. The company increased its dividends for 70 years (from 1937 through 2008). Then it cut its dividend when the financial crisis hit and the company appears again to be in trouble as it finds its way in this new economy.
I consider dividends from stocks to supplement whatever income I generate from investing in real estate. I've learned that markets run in cycles. Dividend paying stocks have been riding high for a long time, but perhaps GE is a proxy for changes to come (or perhaps not, who knows). Perhaps real estate income will play a greater role in my future and if so, I want to be positioned in this space.
@Account Closed thanks for weighing in. Dividends should definitely not be overlooked when deciding how to invest. I’ve cherry picked a few individuals as well (MSFT has been a good one, and the Vanguard high yield ETF I mentioned is heavily weighted with MSFT anyway as it is which I like but I still like SPDR better overall so I have SPDR and I’ve supplemented that with adding shares of MSFT to my portfolio for example) but wanted to keep it as simple as possible by pointing the OP towards high yield funds. Cherry picking individuals can be dangerous and I don’t recommend it for unless 90% goes into a fund and 10% is play money used trying to outsmart everybody else (be prepared to lose it, but you’ll learn from it too). Another good thing about dividends is when the market takes a dive, aristocrat companies tend to actually increase their dividend payments in order to keep investors from selling. Hopefully GE isn’t a proxy for the market! I think that one is an anomaly and a prime example of why I would steer most investors away from picking individuals. It could be a great buy at it’s current price, or not. You never really truly know what’s going on inside of a company, even if you work in the same industry or even if you work for that actual company and think you know, even if they look great on paper and seem like a slam dunk, **** happens. I’ve learned that myself the hard way just when you think you’ve got a pick nailed something comes out of left field that’s why funds are great.
Cherry picking individuals can be dangerous and I don’t recommend it for unless 90% goes into a fund and 10% is play money used trying to outsmart everybody else (be prepared to lose it, but you’ll learn from it too). Another good thing about dividends is when the market takes a dive, aristocrat companies tend to actually increase their dividend payments in order to keep investors from selling.
When I first started investing way back when, I thought that outperforming the market was the way to go. When I first read The Intelligent Investor by Benjamin Graham, for example, I just had to be the Enterprising Investor and not the Defensive Investor.
Now I look for good investments that generate a sustainable positive net cash flow. Practically speaking, the analysis of a dividend-paying company is not that much different from the analysis of a rental property. In both cases, I look for the reasons why the investment is going to continue to be a good one for me over the long run if I buy it, along with the red flags that warn me to stay away.
What is different between the two types of investments is that publicly-traded companies file reports under penalty of perjury with the SEC. Their liquidity (ability to buy and sell quickly at low transaction costs) is higher as a result because the shares trade on an exchange, but they are priced closer to fair value most of the time also. With private real estate, investors are on their own to do a proper vetting of an investment. Real estate investors must surround themselves with a good team. Because the investments are illiquid and can be financed with a higher LTV ratio, the savvy and patient real estate investor can also do well over time.
My approach is strategy and asset diversification. My goal is to generate multiple streams of non-correlated income: some of it from global dividend-paying companies, some of it from local rental properties, and some of it from savings accounts and bonds (and in a prior life, some of it from royalties on intellectual property such as books I tried to write). The idea is that enough of my investments will be performing well enough to allow me to live on the passive income they generate no matter what the overall economy and markets are doing.
I really appreciate all the reply’s I’ve been thinking pretty hard on this topic... I just wanna give you guys a little information about my situation
my main goal is to have passive income with rental properties,and I would also like to invest in low cost index funds witch I have narrowed down too VTI, VOO, and spy also I'm thinking about Roth IRA account.
right now I am 22 working 2 w2 jobs and I'm sick of living in this rat race I have a loan on my car and my current house I am living in I'm thinking about selling my car but I don't want to just buy a cheap car and have to always get it fixed. Since I started getting into self help and financial freedom books and podcast I've been saving money in a savings account for a year now so I have a decent saved up I'm just not really sure what I should do with it I'm stuck between investing in low-cost index funds / Roth IRA / rental property's I know investing in all would be great I'm just not really sure on the process
@Austin Mize that's great that you're saving and learning about investing at your age, you've got a bright future getting started so young. . You didn't mention primary residence so I'm assuming you're renting? If so I'd focus on owning a primary residence first. Depending on where you live and how much you need for a down payment in your area I would recommend starting with a house hack situation either a large enough house to have roommates that pay your mortgage or even better a duplex. Investing is both an offensive and defensive situation where keeping expenses low is just as important as investing wisely and having roommates or tenants next door covering a mortgage kills both those birds with one stone. Regarding the car, the wisest investors I know drive old beaters even though they can afford nice cars, a big car payment is the worst thing you can do. I stick with reliable brands like Toyota and drive them into the ground. If you can get by without a car by all means do so it will help your DTI if you dont have a car payment.
Think about a low-cost index fund as a proxy for investing in the entire economy. Warren Buffett calls it "extreme diversification" and recommends most investors (including professional money managers) take this approach.
I use the CORE and EXPLORE approach. Money I can't afford to lose is in my CORE portfolio (a diversified basket of low-cost index funds [also called "asset allocation"]) and the Dividend Aristocrats mentioned above. Money I can afford to lose, but don't want to lose, is in my EXPLORE portfolio, such as crowdfunding, options trading, and real estate finance (note investing).
My Dividend Aristocrats were in my EXPLORE portfolio when I started out. But they are now working successfully, so I consider them part of my CORE portfolio. My goal is some day, the investments currently in my EXPLORE portfolio will become part of my CORE portfolio as I become competent in managing them successfully.
I also owned a home once (33 years) and glad to have had the experience. Owning a home has its rewards, but it's also a full time job (which is how I know I would not enjoy managing rental property). I'm not sure if I want to own another home again, but the possibility remains on the table.
My only regret is not starting to invest when I was in my early 20s. Looking back on my life, the opportunity was there right under my nose and I ignored it. But rather than playing the coulda, shoulda, woulda game with myself, I just suck it up and move on.
@Steve K. I currently have a FHA loan on my house just bought it 2 years ago.
@Austin Mize apologies I just reread your comment where you mention you have a home loan already. Lots of options for a young man like you, I’d say if you want a more passive investment buy up some blue chip stocks or a fund with high dividend yield like the ones we’ve been discussing, or if you want a more active investment get into real estate and find properties that you can force appreciation on with sweat equity. Just be aware that the real estate route could easily turn into a 3rd job! It’s a job working for yourself that gives you control over your schedule but a job nonetheless. Even if you hire a manager real estate is a business you have to run while stocks are much closer to being a passive investment. If you have a passion for running a real estate business then jump in but if you’re looking to free up more time for other things it’s high dividend yield ETF all the way.
I use index funds- a 3 fund portfolio thru vanguard, I also have a Roth as well