are closer to retirement age, then you need to research bonds, but
otherwise stock Index Funds are the place to start.
I invest in funds that are linked to indexes (or if you prefer,
Indices... I can roll that way too, dog!)
What's an index? An example of index is the S and P 500...basically it
is a system of tracking 500 stocks and their performance as a
benchmark of overall market performance.
Ok, now that you know all about indexes , I will say I like index-
based funds because:
* Fund Managers attempt to beat an index (generally the S and P 500)
and most of them fail to do so. So if you do as well as the index, you
are getting a better return than most managed funds.
* The manager of a fund has to get paid. An index fund does not have a
manager, so the expenses on managed funds are generally higher than on
index funds.
Ok, so now you have a clue about what you want to buy, namely: Stock-
based index funds. So, you might be thinking, Which funds should I
buy? That's why I like you so much, reader, because you ask such
wonderful questions!
This brings up the wonderful topic of Where to put your money, which
is otherwise known as: (Drum roll, please)
Stock Index Funds: Asset Allocation!
Stock Index Funds: Scenario #1:
Stock Index Funds Question: I'm busy, so I only have time to invest in
ONE fund, any help?
A: If you only get one fund, then I suggest you get a fund based on
the S&P 500 Index. Most 401k plans will offer such a fund. These
get you build-in diversity of 500 companies. Some fund ideas are:
* SPY: ETF called Spiders.
* VFINX: Vanguard's S and P 500 Fund.
Stock Index Funds: Scenario #2:
Stock Index Funds Question: I have a little bit more time to devote to
investing; do you have any more ideas?
A: Sure! If you do a little research, you will find these categories
of options that are labeled Asset Classes and funds within each class.
Here's a break down of how I do my Asset Allocation:
US based funds (Domestic)
US Large Company Funds: 20%
US Large Value Funds: 20%
US Small Company Funds: 10%
US Small Value Funds: 10%
Foreign Funds (Overseas)
Foreign Large Funds: 15%
Foreign Large Value Funds: 10%
Foreign Small Company Funds: 10%
Emerging Market Funds: 5%
Stock Index Funds Question: How do I find good funds of each class?
A: I'm glad you asked. You should do the research and find funds that
have a low expense ratio...lower is better, because it is the money
you pay to own the fund.
I did a little research (not using my broker, so you can too) and
found out that Vanguard has a good link that shows the different funds
(ONLY that they sell, of course).
Stock Index Funds Question: I don't have enough money to invest in all
of these funds. Which funds should put my in money first?
A: My method is invest in U.S.-based funds first, and from top to
bottom. It took me several years to purchases funds in all of these
classes.
Stock Index Funds Question: Ok, but what happens when the value of a
fund within a class exceeds its target allocation?
A: Well, first...THAT'S GREAT!!! It means that you are making money!!!
Don't worry about it.
You re-balance once per year. I keep a spreadsheet in which I enter
the total amount of money invested and then calculate the target
percentage and compare that to the actual amount of money I have in
the fund.
If I have too much money in a class, I sell shares of that fund class.
If I don't have enough in a class, I buy more shares of that fund
class. I only do this once per year in order to keep my transaction
fees minimized.
Some people re-balance every three years...try it both ways...but I
recommend at least this checking once every year.
Stock Index Funds Question: What is a transaction fee?
A: Every time you buy, sell, or exchange funds, you are charged a fee
(these vary by broker and fund).
Stock Index Funds Question: Do I have to pay taxes when I sell?
A: In a taxable account, YES! That is why tax-advantaged accounts are
so cool.
And another reason to only re-balance once per year. You really want
to hold onto a fund for at least one year, plus one day, in order to
ensure your capital gains taxes are at the lower "long-term" rate.
(If you make a profit, of course, that's what capital gains taxes are
all about. If you lose money, that's a whole other proposition, and
maybe a topic for another post!, but you don't pay tax on a loss.)
Stock Index Funds Question: How much money do I need to start?
A: Good question!! Every fund has a minimum opening investment,
generally in the range of $2000 - $3000 dollars. This is an added
wrinkle when trying to establish an opening position in a new fund.
You might have left over money, but not enough to open up a new fund.
In that case, the only thing you can do is spread out that extra money
in the funds you already own and wait for them to grow.
You see, once you have a position in a fund, you can add to it in any
amount, small or large.
For example, if I already made my initial investment in VFINX for
$3000, and I want to add $1000 the next year, I can do that. But, I
can't take that $1000 and invest it in a new fund if the new fund has
an initial investment of more than $1000.
If you don't have any funds at all, and you are looking to get your
first one, but you don't have the minimum amount to open that
position, you'll have to either find a fund with a smaller opening
investment, or just hold on to that extra money until you do have
enough to get into to the larger ones.
THAT's it...I used this method to built my core of investments...now I
am doing the explore...where I buy stock in great companies...but that
is another article for another day!
Trading Secrets Turn $10,000 Into 2 Million Dollars Within 18 Months:
http://www.ndshtrading.tk/
�/
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