A Beginners Guide to Mutual Funds

A Beginners Guide to Mutual Funds

1Although I get asked regularly to do so, I’m always wary of making specific investment advice . I’m haven’t passed any securities exams, and I have no financial letters after my name like CFA, CFP, CIC, or ChFC. I’m just a SRDO – Some Random Dude Online.

At the same time, I also appreciate the fact that people like to hear some specific suggestions in order to jumpstart their own research. It’s like being told “go buy a good used car” versus “check out the 2002-2004 Honda Civic (7th Generation, but not the 1st year) with less than 60,000 miles on it.” It’s not the perfect answer for everyone, and you may not even buy that car, but it gives you something to work with.

With that in mind, this is what I would tell my sister to invest. Not you, because I don’t know you.  She’s in her early 20s, recently out of college, working in her first professional job, and trying to balance renting in a big city, being young and trendy, paying back student loans, and oh yeah! – also retirement. She’s busy, doesn’t feel like reading the books I recommend just yet, but has some extra money now to put away for the future. So what does big bro tell her?

Get investing! You need to do this now so you can:

  1. Reduce your risk in the long run
  2. Get used to the ups and downs of the stock market (so you don’t just bail out later).

Option 1: No Money Down?
Set Up An Automatic Transfer at TIAA-CREF or T. Rowe Price

If she’s doesn’t have much to start with but is willing to set aside $50 every month, you can open an account at T. Rowe Price or TIAA-CREF with no initial investment minimum. If you’re in your 20s, look at the T. Rowe Price Retirement 2045 fund (TRRKX) or TIAA-CREF Lifecycle 2040 (TCLOX). Both seem to be solid companies with good customer service. They will get you “in the game”, are very low-maintenance, and will leave you with plenty of time to refine your tastes afterwards.

The good thing about starting low is you’ll get gradual exposure to the volatility of the market. In the beginning, it took me a while to get used to the fact that my balance could easily be much lower than it was yesterday. That can be very disconcerting for those only used to bank accounts.

Option 2: Think Long Term
Open Up An Account at Vanguard

I make no secret that I really like Vanguard. They have reliably low expenses, are fair and upfront about their fees and how they are compensated, and they are client-owned. Although they may have some higher fees in the beginning, I believe that over the long run their low expenses and indexing-expertise will result in superior performance. This is a company that I can see sticking with for the next 50+ years. So here’s one strategy using Vanguard for any account size:

Less Than $1000 – If she has less than $1,000, I’d tell her to just stick it in a high-yield savings account. Set up some automatic transfers from her checking account after each paycheck, and start building that up until you have…

$1000-$3,000 – Here, the only fund that’s available is the Vanguard STAR Fund (VGSTX). You can open up with $1,000 to start and add in $100 more at a time. It’s an okay fund, currently with 63% stocks, 25% bonds, and 12% cash. The point isn’t to get the perfect asset allocation right away, it’s to get get started. Again, see the two main goals above.

$3,000+ – When you get to this amount, exchange your shares into the Vanguard Target Retirement 2045 Fund (VTIVX). Since it’s in an IRA, there are no tax consequences or paperwork to worry about. See my post comparing Vanguard and T. Rowe Price Target funds for why I like it the best.

With all of these options, it is always a good idea to set up automatic transfers to avoid the “I forgot again because I was busy” factor. Also, feel free to call any of these companies on the phone. You should get a helpful human quickly, I always do with Vanguard.

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