Super Simple Way To Start Investing In Index Funds
You’ve read a few websites, you have borrowed some books from the library and now you are perhaps even more confused. You just want to know the actual next steps.
It’s like reading UpToDate, at some point you’re yelling in your head “Okay already, what’s the next step?!” I am going to outline how I started out investing and I’ll take you through it step by step.
I wanted major simplicity. It’s much harder for you to take something simple and try to make it more complex later so this method also tamper-proofs your portfolio.
First you need to determine your investing philosophy and figure out your risk tolerance. You probably have various factors such as debt and dependents that you need to take into account. I am single, 37 years old as of this writing and I invest to reap some passive income benefit down the road. My goal isn’t for my $5,000 invested to become $125,000 because I picked the next winner… I want my shit to grow at a rate that’s better than what my savings account offers or what I can get from a CD.
Come up with a few index funds that you want to be a part of over the next 1-3 decades. I wanted to have some stocks (equities) representation, bonds and REITs. I chose Vanguard as my investment firm because I understand their business model and they have the lowest fees. I invest my money so that my stocks would represent 90% of my holdings, bonds 5% and REITs another 5%.
After I opened my Vanguard account I transferred all my money into a money market fund first inside Vanguard. Then I bought some VTSAX (90%), VBTLX (5%), and VGSIX (5%). A rep on the phone can help you if you have trouble with this. I can easily see what the annual fees are for each of these funds and I know that there are no other hidden fees. VGSIX, for example, costs me 0.26% per however much I have invested annually.
Then every paycheck I pay myself first by transferring a set amount into my Vanguard account directly into the money market fund, usually around $4,000 every 2 weeks. I then buy VTSAX, VBTLX and VGSIX in the appropriate amounts to maintain my 90%, 5%, 5% ratio.
That’s it, this concludes method #1. Super easy, fairly diversified, and perfect for my risk comfort.
This one is far simpler. I did this one before I switched to Vanguard. I’m a bit if a control freak so I wanted a very particular asset allocation otherwise I would have stuck with it.
So, open a Betterment account and select your asset allocation. I chose 90% stocks and 10% bonds at that time. Setup and automatic debit from your checking account every paycheck and Betterment will do the rest.
That’s it, you are done. How sweet is that?
Downside to method 1 is you have to do a little more setting up and there is a bit more work though you can have this automated quite easily. Upside is that you will pay the cheapest percentage fees since you are buying the fund directly from the company that holds them (Vanguard).
Downside to method 2 is that Betterment charges you a little every year for using their service on top whatever each fund charges you. So, if Betterment charges you let’s say 0.25% and the fund they buy for you charges you 0.25% then you pay 0.5%. But this is a very tiny percentage and since they use mostly ETF’s you don’t pay much every year to those fund companies.