Investing questions.

[thirtythree]

I have a Roth IRA through Vanguard and all of my money is invested in VFINX. I'm 20 and, in theory, won't need the money till I retire.

1. What are the advantages and disadvantages to value, growth, and blend funds?
2. Do you think any of my money should be invested in bonds? Low-cap or mid-cap funds? Other large-cap funds? If so, what percentage? Are there any specific funds you'd recommend?

Uhh... I think that's all for now.

 

[dullard]

[*]Growth: Good possiblity for high profits and thus high returns. However, that is already priced into the stock, meaning it costs you a lot of money up front for this (you get less stock per dollar you invest). And of course if the high growth isn't there, that stock plummets.
[*]Value: Consistant returns, profits are probably consistant. It isn't fancy, so the price is low. You get more stock for your money. But likely it won't skyrocket either direction.
[*]Blend: Basically in the middle of the two.

[*]Small cap: small companies that either go belly up or make it big. Can be a good money maker but can also be more risky.
[*]Large cap: big, usually sound companies. Priced already at a premium.
[*]Mid Cap: Basically in the middle of the two.

You basically want each. You want diversification. If one stock gains a lot - you have it and you gain a lot. If one of your stock falls, you only have a little and it doesn't hurt you much because you didn't put all your eggs in one basket. Diversification for the win! Thus, you want large value companies; you want large growth companies; you want small value companies; and just a little bit of small growth companies (use less of this since historically returns are average but risk is high).

Any good mix of funds like that will cover your mid-cap and blend companies, so you can forget about them.

Now repeat all of this internationally too, but at half the level of your domestic stocks.

Then add 10%-20% bonds to even things out (bonds and stocks often go in opposite directions, so a little bit of bonds helps lower volitility drastically without impacting returns much at all).

A pretty good mix would thus look like this:
[*]1/8th large growth - domestic stocks.
[*]1/8th large value - domestic stocks.
[*]1/8th small value - domestic stocks.
[*]1/16th small growth - domestic stocks.
[*]1/16th large growth - foreign stocks.
[*]1/16th large value - foreign stocks.
[*]1/16th small value - foreign stocks.
[*]1/32th small growth - foreign stocks.
[*]20% bonds.
[*]The remaining 15% in several specialized areas, just a few percentage of each: metals, REITs, etc.

Of course these are approximate levels, and you won't do bad even if you go so far as to double one of these or eliminate another. And if you are just starting, you probably don't have enough money to actually buy that many items. But, it is just a good goal to have and something to eventually strive for.

 

[DaveSimmons]

^ good advice from dullard, but since you can only add $4K/year you don't want to add several funds at once, you want to build up enough in each fund to avoid the $10 fees for funds with blanaces below $10K.

If you add 3 new funds, the first $30 of your growth goes to fees, compared to $10 for adding just one new fund like VEURX, VEIEX or VEXMX, or saving $10 if you added enough more to VFINX to push it over $10K.

Once you're making enough to have a normal, non-retirement brokerage account you can come out ahead on taxes by placing VFINX and any bond funds in the taxed account while you put the small-cap and foreign stocks into your tax-sheltered funds (Roth IRA and 401K rollover IRA).

 

[thirtythree]

Thanks, dullard. Just a couple questions. First, how does buying large- and small-cap funds cover mid-cap companies? Just because the outliers in both funds qualify as mid-cap companies? Wouldn't it be safer to invest in large- and mid-cap funds without (as far as I can tell) a big difference in potential returns?

Second, doesn't a "blend" fund invest in both growth and value companies, or just companies that fall in the middle? If the former, is there any reason it would be better to invest in a large growth fund and large value fund rather than to invest twice as much in a large blend fund (e.g., VFINX)?

 

[FoBoT]

you are 20, you don't need any bonds

anyone under age ~45 should be 100% in the stock market (or perhaps some % in real estate if that is your thing)

bonds are for income/when you are approaching/in retirement

 

[thirtythree]

Originally posted by: DaveSimmons
^ good advice from dullard, but since you can only add $4K/year you don't want to add several funds at once, you want to build up enough in each fund to avoid the $10 fees for funds with blanaces below $10K.

If you add 3 new funds, the first $30 of your growth goes to fees, compared to $10 for adding just one new fund like VEURX, VEIEX or VEXMX, or saving $10 if you added enough more to VFINX to push it over $10K.

Once you're making enough to have a normal, non-retirement brokerage account you can come out ahead on taxes by placing VFINX and any bond funds in the taxed account while you put the small-cap and foreign stocks into your tax-sheltered funds (Roth IRA and 401K rollover IRA).

Oh yes, nearly forgot about those fees. Those don't apply to bonds, do they? I think it probably would be best to invest in just 1 or 2 stocks till I have more money to work with. So I guess the question is, should I just stick with VFINX or invest in a second fund as well? If so, what? Are there any fees for selling and buying with Vanguard? And... when funds have a $3000 minimum, does that mean I need to have $3000 invested in that fund or just have $3000 in my account total?

 

[DaveSimmons]

> when funds have a $3000 minimum, does that mean I need to have $3000 invested in that fund

$3000 in that fund.

You might add -1- new fund, either a small-cap or foreign, since they tend to gain when the large-cap funds lag.

If you have enough cash set aside, you could put in money for 2005 and also part of 2006 as long as you expect to have earned income this year.

 

[thirtythree]

Originally posted by: DaveSimmons
> when funds have a $3000 minimum, does that mean I need to have $3000 invested in that fund

$3000 in that fund.

You might add -1- new fund, either a small-cap or foreign, since they tend to gain when the large-cap funds lag.

If you have enough cash set aside, you could put in money for 2005 and also part of 2006 as long as you expect to have earned income this year.

Has this minimum changed recently, because I remember my initial investment in VFINX was only $2500. I already maxed out for 2005. Is there any reason I wouldn't want to put it in for the previous year rather than the current year if I can?

 

[Noirish]

go international and mid-cap.

 

[DaveSimmons]

Originally posted by: thirtythree
I already maxed out for 2005. Is there any reason I wouldn't want to put it in for the previous year rather than the current year if I can?

No, I was saying after maxing out 2005 if you had money left you could also start putting in money for 2006 now instead of waitng.

 

[HombrePequeno]

Originally posted by: thirtythree

Originally posted by: DaveSimmons
> when funds have a $3000 minimum, does that mean I need to have $3000 invested in that fund

$3000 in that fund.

You might add -1- new fund, either a small-cap or foreign, since they tend to gain when the large-cap funds lag.

If you have enough cash set aside, you could put in money for 2005 and also part of 2006 as long as you expect to have earned income this year.

Has this minimum changed recently, because I remember my initial investment in VFINX was only $2500. I already maxed out for 2005. Is there any reason I wouldn't want to put it in for the previous year rather than the current year if I can?

The minimum for a lot of Vanguard funds used to be $1000 (except for ones like the Healthcare fund and the Energy fund which have ridiculous returns). They raised almost all of them a few months ago to $3000. There is only one fund (the STAR fund) that still has a $1000 minimum. It consists of bonds, stocks, and cash.

I personally have all of my money in the Vanguard small cap fund. It is more volatile than the mid and large cap funds. There may be worse downturns but the upswings are a lot higher. Having higher volatility is fine when you are younger. Also, when I start to see a downturn in the economy I can always move my money into less volatile funds that wouldn't lose as much as small cap would.

 

[FelixDeCat]

Originally posted by: Noirish
go international and mid-cap.

QFT.

VEXMX and VWIGX are up 13% and 16% respectively since 10/05, vs VFINX 8.5%.

Mind you, mid cap and international investing is the 'style' de jour and could fall out of favor like the large cap VFINX, so a good mixture doesnt hurt.

See Dullards post for more info.

 

[alrocky]

"Each Vanguard index fund (except the REIT Index Fund) charges a maintenance fee if the balance is below $10,000."

A basic asset allocation would consist of Large Cap, (which you have) Small Cap, International, and bonds:

Vanguard 500 Index Fund Investor Shares (VFINX)

Vanguard Extended Market Index Fund Investor Shares (VEXMX)
Vanguard Small-Cap Index Fund Investor Shares (NAESX)

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Vanguard Total International Stock Index Fund (VGTSX)
1 Vanguard European Stock Index Fund 57.4%
2 Vanguard Pacific Stock Index Fund 28.2%
3 Vanguard Emerging Markets Stock Index Fund 14.4%

---

Vanguard Target Retirement 2045 Fund (VTIVX)
1 Vanguard Total Stock Market Index Fund 70.4%
2 Vanguard Total Bond Market Index Fund 12.1%
3 Vanguard European Stock Index Fund 11.8%
4 Vanguard Pacific Stock Index Fund 5.7%

If you wish to retain VFINX, you should next consider for the domestic portion of your asset allocation, a small cap like NAESX or a mid-cap like VEXMX. VEXMX mirrors the "S&P Completion Index" and together with VFINX represents the entire US stock market = VTSMX.

Alternatively you could trade VFINX for VTSMX.

For international, you should consider something like VGTSX, which itself holds 3 international funds.

If you would like something simpler that involves less fees, you should consider the Lifecycle or Target Retirement funds like VTIVX which is comprised of 4 funds.

------

A 80/20 Stocks/Bonds ratio may be appropriate for you:

30% Large Cap
30% Small Cap
20% International
20% Bonds

 

[thirtythree]

Originally posted by: DaveSimmons

Originally posted by: thirtythree
I already maxed out for 2005. Is there any reason I wouldn't want to put it in for the previous year rather than the current year if I can?

No, I was saying after maxing out 2005 if you had money left you could also start putting in money for 2006 now instead of waitng.

Oh, I am.

 

[thirtythree]

Originally posted by: alrocky
"Each Vanguard index fund (except the REIT Index Fund) charges a maintenance fee if the balance is below $10,000."

Do all the index funds have index in their title. What exactly is an index fund?

 

[DaveSimmons]

Originally posted by: thirtythree

Originally posted by: alrocky
"Each Vanguard index fund (except the REIT Index Fund) charges a maintenance fee if the balance is below $10,000."

Do all the index funds have index in their title. What exactly is an index fund?

There are 2 kinds of stock funds (or three counting funds like VGTSX that bundle other funds):

Index funds hold only the stocks that appear on some list like the S&P 500. There are no stock-pickers and no one decides when to buy or sell, so fund management costs are very low. These are also called "passive" funds. There are many different indexes / indices.

Actively managed funds use stock-pickers who choose stocks in an area like large cap US stocks or energy stocks. They pick stocks using keen intellect and a supply of darts. You pay 2 to 10 times as much in management fees to keep the stock pickers in hookers and booze.

Most professionals actually aren't that great at picking stocks, despite their computers, ouija boards and single-malt scotch, so the S&P 500 outperforms most actively managed funds over time. It's like the house, and the stock-pickers are the gambling addicts.

 

[alrocky]

Vanguard index funds have index in their names. An index is a representative sample of a segment or particular portion of the stock market. A small cap index fund holds a representative of the small cap stocks in the stock market. http://www.moneychimp.com/articles/index_funds/overview.htm

You should go to Vanguard's site > Planning & Education > General investment planning, and "Create your investment plan". Visit Morningstar.com > Discuss > Vanguard Diehards. Also read conversation #9885 "favorite books for beginners" in the Discuss > Investment Basics forum for a suggested reading list. At the very least read Eric Tyson's Mutual Funds for Dummies which is atop "The Best Books on Fund Investing" under Learn > Recommended Readings > Fund Investing.

should I just stick with VFINX or invest in a second fund as well? If so, what? Are there any fees for selling and buying with Vanguard?

If you plan on retaining VFINX, I'd suggest you hold off on a second ROTH IRA fund until you have at least $10,000 in VFINX. FYI Vanguard charges "$10 a year for each [IRA] fund account with a balance of less than $5,000." Do you have enough money for a second fund and thereby avoid this 'nuisance' fee?

If I had to pick my first ROTH IRA mutual fund again I'd strongly consider a fund like VTIVX as it offers instant diversity at a low Expense Ratio of 0.21% Since if offers excellent diversity you could wait until it reaches $10,000+ before getting a second fund.

Only one Vanguard (VEIEX) fund has a "purchase fee". A few have a selling or "redemption fee" if you sell it too soon after buying it, generally 2 months. But most of those funds have a $10,000+ 'buy in' or minimum purchase so it doesn't affect you yet.

----

Once you invest $4,000 in your tax year 2006 ROTH IRA, you should consider a mutual fund in a taxable account. Do you have a 401k or similar plan with your employer?

BTW, an excellent move on your part on starting your IRA at your age.

 

[thirtythree]

Originally posted by: alrocky
If you plan on retaining VFINX, I'd suggest you hold off on a second ROTH IRA fund until you have at least $10,000 in VFINX. FYI Vanguard charges "$10 a year for each [IRA] fund account with a balance of less than $5,000." Do you have enough money for a second fund and thereby avoid this 'nuisance' fee?

Again, I thought that only applied to my total balance. So there will be a $20 fee for any index fund I invest in with less than 5k and a $10 fee for any index fund I invest in with less than 10k?

If I had to pick my first ROTH IRA mutual fund again I'd strongly consider a fund like VTIVX as it offers instant diversity at a low Expense Ratio of 0.21% Since if offers excellent diversity you could wait until it reaches $10,000+ before getting a second fund.

I was considering switching to this. My main concern is that it will get conservative sooner than I want it too, but maybe that's a good thing. These types of funds also have only been around for 2 years (edit: actually, I don't think that's an issue).

Once you invest $4,000 in your tax year 2006 ROTH IRA, you should consider a mutual fund in a taxable account. Do you have a 401k or similar plan with your employer?

No I don't. I'm still in school and working part time, so I think investing $4000 each year for the next couple years will be challenging enough. I'll keep this in mind if I do end up having more money though.

 

[bigdog1218]

Originally posted by: FoBoT
you are 20, you don't need any bonds

anyone under age ~45 should be 100% in the stock market (or perhaps some % in real estate if that is your thing)

bonds are for income/when you are approaching/in retirement

Exactly. I'd even go one step further and say your money should be in stocks, and stay away from mutual funds since they're nothing but window dressing. Why anyone would give a random person their hard earned money and not have any say in how the money is invested is beyond me. Read some books and do the extra leg work. It's puzzling that people work hard to earn their money, then get lazy with investing.

 

[drnickriviera]

Originally posted by: bigdog1218

Originally posted by: FoBoT
you are 20, you don't need any bonds

anyone under age ~45 should be 100% in the stock market (or perhaps some % in real estate if that is your thing)

bonds are for income/when you are approaching/in retirement

Exactly. I'd even go one step further and say your money should be in stocks, and stay away from mutual funds since they're nothing but window dressing. Why anyone would give a random person their hard earned money and not have any say in how the money is invested is beyond me. Read some books and do the extra leg work. It's puzzling that people work hard to earn their money, then get lazy with investing.

Because people don't want to track their stocks every day to make sure it doesn't drop 20% because the company missed estimated by a penny. And you get the diversification you could never get buying individual stocks.

What are your rate of returns for the past 10 years?

http://finance.yahoo.com/q/pm?s=TAVFX
Is one mutuals on the top of my list. That works out to a compounded rate of return of 14.2% over 10 years vs 9% for the index 500. If you invested $10,000 in 96' you'd have $37,699 for Third Avenue vs $23,666 for the Index 500. Blah Blah Past Performance ....

I'll be the first to admit that many mutuals are bad. I lost a good bit of money in mutuals, but you have to sort through the bad to find the few good ones.

 

[Taggart]

Originally posted by: bigdog1218

Exactly. I'd even go one step further and say your money should be in stocks, and stay away from mutual funds since they're nothing but window dressing. Why anyone would give a random person their hard earned money and not have any say in how the money is invested is beyond me. Read some books and do the extra leg work. It's puzzling that people work hard to earn their money, then get lazy with investing.

I don't want to spend several hours a week analyzing my portfolio and reading every financial report a company releases. It takes a LOT of time to successfully invest in individual stocks. 80% of full-time professional fund managers don't even beat the S&P 500 over the long term. You have to be a financial genius to even beat the S&P 500 investing in individual stocks over the long term.

To tell you the truth, after the Worldcom and Enron disasters I don't feel safe investing in any one company no matter how much time you put in. There is no way Joe Sixpack investor could have seen that the stocks of those companies would crash.

 

[DaveSimmons]

Originally posted by: bigdog1218
Exactly. I'd even go one step further and say your money should be in stocks, and stay away from mutual funds since they're nothing but window dressing. Why anyone would give a random person their hard earned money and not have any say in how the money is invested is beyond me. Read some books and do the extra leg work. It's puzzling that people work hard to earn their money, then get lazy with investing.

That makes -some- sense for people with a lot of time on their hands, in place of buying actively managed funds (see explanation above).

Index funds are a different story, where the odds are against you doing better picking your own stocks, and given trading costs you can't come anywhere near their diversity and safety.

 

[bigdog1218]

Because people don't want to track their stocks every day to make sure it doesn't drop 20% because the company missed estimated by a penny. And you get the diversification you could never get buying individual stocks.

I don't want to spend several hours a week analyzing my portfolio and reading every financial report a company releases. It takes a LOT of time to successfully invest in individual stocks. 80% of full-time professional fund managers don't even beat the S&P 500 over the long term. You have to be a financial genius to even beat the S&P 500 investing in individual stocks over the long term.

-Ok you got 14% over 10 years on your best fund, what about the other ones. Your funds over 30 years will be lucky to beat the S&P, lucky. It's not how much you make in a bull market, it's losing money on bad stocks that actually makes a difference. When the market turns south I move into safe stocks, or just money market accounts. You hold on and watch TAVFX, your best performer, drop 15%. When a sector looks bad I move out of it, as TAVFX, your best performer, takes months to make the move.

-I have over 250 stocks in my database, every sector, every size, plus equations to determine my stops and target prices. I'm not going to lie, that did take a lot of work to put together. But it might take 5 minutes a day to check the 6 I own now. Thats 25 entire minutes a week to beat the S&P.

- I use stops to make sure I don't eat 20% because of bad news, I also use stops based on chart patterns to determine when I should get out. Plus getting killed because of bad news is rare, and theres nothing I or your fund manager can do about it. But I can capitalize on my winners because I don't have restrictions on what stock I invest in, or how much. And I rarely have market-timing scandals, which I hear are the rave in mutual funds.

-Lets bring up the mighty TAVFX and compare it to another mighty fund, FMAGX. 20 years ago when the greatest fund manager ever ran Magellan, it competed with the major indices. Since then it's been killed by the S&P, Nasdaq and the Dow. Why you think TAVFX will continue to beat the S&P is beyond me, but I guess 2.5 whole years of beating the S&P ensures it will do it until the end of time.

If you your time is that precious buy mutual funds, but don't for a second believe you'll beat the indices or a smart investor with them.

 

[drnickriviera]

Originally posted by: bigdog1218

-Ok you got 14% over 10 years on your best fund, what about the other ones. Your funds over 30 years will be lucky to beat the S&P, lucky. It's not how much you make in a bull market, it's losing money on bad stocks that actually makes a difference. When the market turns south I move into safe stocks, or just money market accounts. You hold on and watch TAVFX, your best performer, drop 15%. When a sector looks bad I move out of it, as TAVFX, your best performer, takes months to make the move.

Did you even bother to click on the link and look at the fund? It's performance during the bear market is what I like about it. They are willing to sacrifice the big gains for preservation of capital.

-I have over 250 stocks in my database, every sector, every size, plus equations to determine my stops and target prices. I'm not going to lie, that did take a lot of work to put together. But it might take 5 minutes a day to check the 6 I own now. Thats 25 entire minutes a week to beat the S&P.

If you're beating the S&P with 6 stocks then I tip my hat to you. Everyone has their own style of investing

-Lets bring up the mighty TAVFX and compare it to another mighty fund, FMAGX. 20 years ago when the greatest fund manager ever ran Magellan, it competed with the major indices. Since then it's been killed by the S&P, Nasdaq and the Dow. Why you think TAVFX will continue to beat the S&P is beyond me, but I guess 2.5 whole years of beating the S&P ensures it will do it until the end of time.

Where do you come up with 2.5 years? I count 6 of the past 10 years it beat vfinx. I did mention it, but you probably didn't understand my comment about past performance. Past performance does not indicate future returns. I think we all know that. What makes you think you picking 6 stocks will beat the S&P? Can say your system has beaten the S&P for the past 10-15 years?

If you your time is that precious buy mutual funds, but don't for a second believe you'll beat the indices or a smart investor with them.

I never said not to buy an index fund. I don't believe I have ever disagreed with Davesimmons for recommending VFINX. I think it's foolish to totally discount mutuals. I'll take my profits wherever I can get them. 20% of my portfolio is VFINX, I also have mutuals, individual stocks, and even t-bills.

 

[alrocky]

If you plan on retaining VFINX, I'd suggest you hold off on a second ROTH IRA fund until you have at least $10,000 in VFINX. FYI Vanguard charges "$10 a year for each [IRA] fund account with a balance of less than $5,000." Do you have enough money for a second fund and thereby avoid this 'nuisance' fee?

So there will be a $20 fee for any index fund I invest in [an IRA] with less than 5k and a $10 fee for any index fund I invest in with less than 10k [in a non IRA account]?

That's my understanding. Email Vanguard to verify. Consider the 'nuisance' fee as motivation to invest more asap.

I was considering switching to this[VTIVX]. My main concern is that it will get conservative sooner than I want it too, but maybe that's a good thing.

Vanguard Target Retirement 2045 Fund (VTIVX)
70.4% Vanguard Total Stock Market Index Fund
12.1% Vanguard Total Bond Market Index Fund
11.8% Vanguard European Stock Index Fund
05.7% Vanguard Pacific Stock Index Fund

You really don't have to worry about it becoming too conservative yet. At 88/12 Stock/Bonds, it may be a while before it becomes conservative. You have several options in the future: buy additional funds to compensate, or switch to TR 2055 or TR 2065 later on when they become available.

Read the forums at Morningstar, particularly the Vanguard Diehards. Read Tyson's Mutual Funds book. Since you can't invest as much if you spend too much, always pay off your credit cards every month. If you carry a balance over month to month that simply means you are spending way too much.


*<sigh> diversity: diversification - last post. stupid brain fart