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Investing Questions

overst33r

overst33r

Diamond Member
First of all, I would like to make clear that I am a newbie when it comes to investing. I am young and would like to take advantage of an investors best friend; time. With those two things in mind I have concluded from some research that I should stick to index funds. It seems that Vanguard has a pretty good expense ratio and the fees are reasonable.*

Based on some research, I decided that the funds I would like to invest in are: VFINX, VEXMX, VEIEX. (Feel free to suggest other funds, but please provide some supportive reasoning).

I plan on keeping the money in the funds long term (at least 5 years, ideally 20+)

I am not sure which fund I would like to put the majority of my money into...
I was thinking VFINX because it will probably be more stable? Although the shares are much cheaper for the other two funds which would probably yield better results in the short term as well as long term using my no0b logic...

I plan on using the "dollar cost averaging method" when I add money to the funds. Is this a good way to go about it?

On average I have about $200 a month left over to spend on anything I want. What would be a good way to split it up amongst the funds I have chosen above?

Another specific question I have is what kind of account do I need to create with Vanguard? According to their descriptions I think I should create a General Investing, Individual, Vanguard® mutual funds account.

*I am having trouble identifying the fees that are associated in creating this account. On their website it says that if I sign up for their e-service package, the $20 annual account service fee for each fund is eliminated. What other fees are there that I am missing?

Also, if I buy the three index funds above, do each of them have to have a minimum of $3000 in them or is this a combined figure?

Is this a good time to start such an account? Can anyone forecast any major dips? 😉

I probably left out some stuff that might be of importance, so feel free to ask.

All comments/advice are welcome and appreciated. Thank you.

 
Since you plan on dollar cost averaging, a huge fall early is great, because you are buying the funds for cheaper, and you get the maximum benefit down the road.
 
> Another specific question I have is what kind of account do I need to create with Vanguard? According to their descriptions I think I should create a General Investing, Individual, Vanguard® mutual funds account.

You could put $4,000 for 2007 and $4,000(?) for 2008 into a Roth IRA account if you have that much in earned income (= job). It grows tax-free, and you can take out the original contributions (but not growth) without paying any penalties.

Once you've funded your IRA for 2007-2008, then you can start a General Investing fund. In that fund the dividends and capital gains paid every year will be taxable.


> *I am having trouble identifying the fees that are associated in creating this account. On their website it says that if I sign up for their e-service package, the $20 annual account service fee for each fund is eliminated. What other fees are there that I am missing?

From their press release I gather that if you sign up for all electronic delivery of statements, prospectus, etc. then the low balance fees will be waived and your total fees will be $0. I haven't read the fine print myself though.


> Also, if I buy the three index funds above, do each of them have to have a minimum of $3000 in them or is this a combined figure?

Each fund has its own minimum


> Is this a good time to start such an account? Can anyone forecast any major dips?

With dollar cost averaging you'll catch any dips. Wait until next week to simplify your taxes and to avoid buying shares just before a dividend ( = tax bite for no gain to you).


> I am not sure which fund I would like to put the majority of my money into... I was thinking VFINX because it will probably be more stable?

VFINX has had good growth over decades, putting at least 50% into it makes sense. 25% ito VEXMX is a good amount. 25% is a bit high for VEIEX, but it would be perfect for the Total International Index fund (that includes VEIEX as part of itself).
 
Originally posted by: mariok2006I am not sure which fund I would like to put the majority of my money into...
I was thinking VFINX because it will probably be more stable? Although the shares are much cheaper for the other two funds which would probably yield better results in the short term as well as long term using my no0b logic...
Click to expand...

Investing in an index fund for the long haul is a great idea. A comment I have, is that the actual dollar value of a share has little to nothing to do with how high it can go. Especially since these are index funds, the price will just follow the actual indexes.

Rather than the extended market index, I'd just get something that tracks the Russell 2000. Russell 2000 follows small caps, which historically have done better than large caps. The volitility will probably be much greater, but if you're holding for 20 years, that shouldn't be a big deal.
 
Originally posted by: DaveSimmons
> Another specific question I have is what kind of account do I need to create with Vanguard? According to their descriptions I think I should create a General Investing, Individual, Vanguard® mutual funds account.

You could put $4,000 for 2007 and $4,000(?) for 2008 into a Roth IRA account if you have that much in earned income (= job). It grows tax-free, and you can take out the original contributions (but not growth) without paying any penalties.

Once you've funded your IRA for 2007-2008, then you can start a General Investing fund. In that fund the dividends and capital gains paid every year will be taxable.
Click to expand...

So does that mean I would have two Roth IRAs, one for 07 and one for 08? Is there a reason you split up the money into 07 and 08 or is that because I am able to invest it at this instant?

I assume that I would still be able to invest in the funds I listed above? Could I add more money on a monthly basis just as I would in a General Account?

What is the advantage of having a General Account when you can basically do the same with an IRA while it grows tax free? Is there a constraint on the Roth IRA that I am missing?

I have about $10,000 that I can invest at the moment. I plan on keeping another $2,000 in HSBC's high interest savings account, that way I have a fairly liquid amount of money in case anything comes up.

Originally posted by: DaveSimmons
> I am not sure which fund I would like to put the majority of my money into... I was thinking VFINX because it will probably be more stable?

VFINX has had good growth over decades, putting at least 50% into it makes sense. 25% ito VEXMX is a good amount. 25% is a bit high for VEIEX, but it would be perfect for the Total International Index fund (that includes VEIEX as part of itself).
Click to expand...

According to Vanguards website the VGTSX was established after the VEIEX, aren't they in a way partially duplicating each other?
 
Originally posted by: flashbacck
Originally posted by: mariok2006I am not sure which fund I would like to put the majority of my money into...
I was thinking VFINX because it will probably be more stable? Although the shares are much cheaper for the other two funds which would probably yield better results in the short term as well as long term using my no0b logic...
Click to expand...

Investing in an index fund for the long haul is a great idea. A comment I have, is that the actual dollar value of a share has little to nothing to do with how high it can go. Especially since these are index funds, the price will just follow the actual indexes.

Yeah, as I was typing that statement I figured there was something that I was missing. Thanks for the insight.

Rather than the extended market index, I'd just get something that tracks the Russell 2000. Russell 2000 follows small caps, which historically have done better than large caps. The volitility will probably be much greater, but if you're holding for 20 years, that shouldn't be a big deal.

Does Vanguard have an index that tracks the Russell 2000 or would I have to make an account at another broker and buy it separately?
Click to expand...

 
The VGTSX Total International is a "fund of funds." Buying it gets you shares of VEIEX plus their European and Asian index funds. You buy one fund and get world-wide diversification.

You'd buy it instead of VEIEX, not in addition to it.


With a Roth IRA retirement account you would have a single account. The splitting is because you can only put so much into it every year. For tax year 2007 you can put in $4,000 total, any time between 1-1-07 and 4-15-08. For tax year 2008 you can put another block of money into that account ($5,000) between 1-1-08 and 4-15-09, then more each year for 2009, 2010, etc.

Vanguard lets you buy the same funds for a retirement account, and some of the minimum investment amounts may be lower (I haven't looked).

What most people do is fund a Roth IRA and their 401k at work, plus put some emergency money into a high interest savings account somewhere like INGDirect.com. Then if they still have money left over, they start a general account.
 
With $10,000 to start and $200/month after that you could do something like this:

$6,500 into a Roth IRA account, $4 for 2007 and $2.5 for 2008. Split the money between VEXMX and VGTSX. This puts the small-cap and foreign into a tax-sheltered account.

$3,500 into a General > Mutual Fund account, all in VFINX. You'll pay taxes on dividends and capital gains each year but these are low for VFINX / S&P 500.

$200/month: you can put another $2,500 into the Roth for tax year 2008 so do that first. If you can scrape up extra money put it into your general account. Also try to build up the savings account a bit higher than $2,000.

Living below your means for a couple of years now to build up your accounts will make a huge difference in how well you live when you retire early.
 
Originally posted by: mariok2006
So does that mean I would have two Roth IRAs, one for 07 and one for 08? Is there a reason you split up the money into 07 and 08 or is that because I am able to invest it at this instant?

I assume that I would still be able to invest in the funds I listed above? Could I add more money on a monthly basis just as I would in a General Account?

What is the advantage of having a General Account when you can basically do the same with an IRA while it grows tax free? Is there a constraint on the Roth IRA that I am missing?
Click to expand...

You open one Roth IRA, but when you deposit money, you have to specify what year the money is for. For example, I have 2006 and 2007 money in my Roth IRA right now, but it all shows as one account with one fund.

You can add money any time you want, until you reach that year's contribution limits.

The Roth IRA is supposed to be used for retirement. You can only withdraw contributions (not earnings) before retirement age. In that respect, it is much more flexible then a traditional IRA or 401K, but not as flexible as a general investing account.
 
Originally posted by: mariok2006
Originally posted by: flashbacck
Originally posted by: mariok2006I am not sure which fund I would like to put the majority of my money into...
I was thinking VFINX because it will probably be more stable? Although the shares are much cheaper for the other two funds which would probably yield better results in the short term as well as long term using my no0b logic...
Click to expand...

Investing in an index fund for the long haul is a great idea. A comment I have, is that the actual dollar value of a share has little to nothing to do with how high it can go. Especially since these are index funds, the price will just follow the actual indexes.

Yeah, as I was typing that statement I figured there was something that I was missing. Thanks for the insight.

Rather than the extended market index, I'd just get something that tracks the Russell 2000. Russell 2000 follows small caps, which historically have done better than large caps. The volitility will probably be much greater, but if you're holding for 20 years, that shouldn't be a big deal.

Does Vanguard have an index that tracks the Russell 2000 or would I have to make an account at another broker and buy it separately?
Click to expand...
Click to expand...

They have a small cap index, NAESX, that tracks the MSCI US Small Cap 1750. Didn't see one specifically for the Russell 2000.
 
Originally posted by: sciencewhiz
Originally posted by: Lothar
The problem with VGTSX is that it's a "fund of funds", meaning it has a minor tax issue.
Click to expand...

Can you expand on that?
Click to expand...

VGTSX isn't eligible for foreign tax credit.
The foreign tax credit is a refund of taxes that the fund pays in foreign countries.
 
Originally posted by: Lothar
Originally posted by: sciencewhiz
Originally posted by: Lothar
The problem with VGTSX is that it's a "fund of funds", meaning it has a minor tax issue.
Click to expand...

Can you expand on that?
Click to expand...

VGTSX isn't eligible for foreign tax credit.
The foreign tax credit is a refund of taxes that the fund pays in foreign countries.
Click to expand...

It doesn't matter if it's in your Roth IRA, only for foreign funds in a non-tax-sheltered account.
 
Originally posted by: DaveSimmons
Originally posted by: Lothar
Originally posted by: sciencewhiz
Originally posted by: Lothar
The problem with VGTSX is that it's a "fund of funds", meaning it has a minor tax issue.
Click to expand...

Can you expand on that?
Click to expand...

VGTSX isn't eligible for foreign tax credit.
The foreign tax credit is a refund of taxes that the fund pays in foreign countries.
Click to expand...

It doesn't matter if it's in your Roth IRA, only for foreign funds in a non-tax-sheltered account.
Click to expand...

Which is why I said it's a "minor" issue. 😉

Two ways to bypass...
1.) Invest using a tax sheltered account. (easiest way as you mentioned)
2.) If you desperately want VGTSX in taxable account, invest your money in the 3 funds directly instead of VGTSX(this will probably require about $20k minimum because the funds have a $3k minimum investment.
Vanguard European Stock Index Fund 56%
Vanguard Pacific Stock Index Fund 24.5%
Vanguard Emerging Markets Stock Index Fund 19.5%

The benefit is that you can re-balance using your own ratio combination of the 3 funds if you want instead of Vanguard's(that can also be a disadvantage for inexperienced investors), and you'll still be eligible for the foreign tax credit.

Again, if this is for a tax sheltered account, the foreign tax credit benefit I mentioned is pretty much moot.
I'll take VFWIX over VGTSX in a taxable account any day of the week anyways.
 
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