I feel that most investors can end up doing just fine with index funds. Index funds track a benchmark of stocks, and since they simply track the benchmark they are not actively managed.
Many studies have shown that most professionals in stock selecting do not even beat this benchmark consistently.
The reason why most index funds are so good is that their expenses are much lower than actively managed funds. Many index funds will charge between 3-5% of your upfront deposit. This means that if you buy $1000 of a mutual fund with a 5% charge, you are really only investing $950. Lets say that this mutual fund along with the index both earn 10% in a year. Your actively managed mutual fund will be worth $950 times .1 = $1,045 while the index fund, since it did not charge the initial 5% fee, would be worth $1000 times .1 = $1,100. This makes a BIG difference over time.
For people who want to make investing as easy as possible, I would recommend investing a percentage of their age into a bond index fund, and the rest in a stock index fund, possibly with international index funds as well. For instance, I am 27 years old, I should invest 27% in a bond index fund and 73% in a stock index fund.
Vanguard and TRowe price are 2 companies I highly recommend. If you have over $1000 to invest at once vanguard's Total Stock Market Index (VTSMX) with an expense ratio of .15% is the way to go. If you need to start slower, TRowe Price allows you to invest as little as $50/month with nothing to start. POMIX is TRowe Prices total stock index, which has an expense ratio of .4%.
In conclusion, automatically investing each month in a Roth IRA, and investing in index funds is a simple and effective way to invest.
Tuesday, April 15, 2008
People first, then money, then things
Suzy Orman says this famous line all over the place. Its probably true, but you need to TRUST the people first before you can give money.
Sunday, April 13, 2008
Little expenses add up
It seems that everyone has something that they cant live without. Whether its a cup of coffee at Starbucks, cigarettes and alcohol, or going out to eat, many times these "wants" are not necessary and can hinder your future finances.
David Bach wrote an excellent book titled The Automatic Millionaire. You can find more information at the link below
http://www.amazon.com/exec/obidos/ASIN/0767923820
What David Bach states is that once you find your "Latte Factor" and eliminate this product or service, many times you can find enough money to save each month.
Dont think that $5 a day doesnt add up? $5 a day is $150 a month, and if you save this in a total stock market index for 30 years this amount is $275,403.43.
Little expenses add up.
David Bach wrote an excellent book titled The Automatic Millionaire. You can find more information at the link below
http://www.amazon.com/exec/obidos/ASIN/0767923820
What David Bach states is that once you find your "Latte Factor" and eliminate this product or service, many times you can find enough money to save each month.
Dont think that $5 a day doesnt add up? $5 a day is $150 a month, and if you save this in a total stock market index for 30 years this amount is $275,403.43.
Little expenses add up.
Importance of an Emergency Fund
It is vitally important to have an emergency fund that is truly used for an emergency because not having one can make for some bad financial practices. Believe me, I know from experience.
When I first moved to Austin it took me a good month to figure out that I wanted to go into financial planning. This also required an additional 4 or so months to study and pass the insurance and financial tests needed to be a planner. When I moved to Austin I had approximately $4,000 saved. During this 5 months (and another month waiting to work for Ameriprise), I have spent all $4,000 and brought upon myself quite a bit of credit card debt.
The 2 biggest problems I faced during this time was that I didnt work during these 6 months and that I was not properly budgeting my money. I wanted to explore Austin and I did have a really good time, however I will be paying for that for a while to come.
As for my lack of budgeting my money this was a problem throughout my whole life. I always thought I had a good running total of how much I made and spent each month. And I also had large credit card limits which I didnt think would be a big deal to use. Little did I know that when I wanted to switch from being a financial planner to being a teacher I would have another few months where I would at least have a decrease in pay until I was teaching. I took a job as a courier and about a month after the job my car needed a new transmission. I had to take out a car loan and get more into debt.
The moral of the story is that if I had an emergency fund and if I properly budgeted my money I would be in a MUCH better financial situation that I am in now. I could have possibly put a down payment on a house in a market where there are bargains. Instead I will need to first pay down my credit cards, then save for my down payment.
Have at least 1 month of expenses in emergency funds available if you are in a stable job (like a teacher), and at least 3 months of expenses for less than stable jobs in an extremely low risk account like a money market account. Ive been using ING since it is super easy and requires almost no paperwork.
When I first moved to Austin it took me a good month to figure out that I wanted to go into financial planning. This also required an additional 4 or so months to study and pass the insurance and financial tests needed to be a planner. When I moved to Austin I had approximately $4,000 saved. During this 5 months (and another month waiting to work for Ameriprise), I have spent all $4,000 and brought upon myself quite a bit of credit card debt.
The 2 biggest problems I faced during this time was that I didnt work during these 6 months and that I was not properly budgeting my money. I wanted to explore Austin and I did have a really good time, however I will be paying for that for a while to come.
As for my lack of budgeting my money this was a problem throughout my whole life. I always thought I had a good running total of how much I made and spent each month. And I also had large credit card limits which I didnt think would be a big deal to use. Little did I know that when I wanted to switch from being a financial planner to being a teacher I would have another few months where I would at least have a decrease in pay until I was teaching. I took a job as a courier and about a month after the job my car needed a new transmission. I had to take out a car loan and get more into debt.
The moral of the story is that if I had an emergency fund and if I properly budgeted my money I would be in a MUCH better financial situation that I am in now. I could have possibly put a down payment on a house in a market where there are bargains. Instead I will need to first pay down my credit cards, then save for my down payment.
Have at least 1 month of expenses in emergency funds available if you are in a stable job (like a teacher), and at least 3 months of expenses for less than stable jobs in an extremely low risk account like a money market account. Ive been using ING since it is super easy and requires almost no paperwork.
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