May 23 2008

Vanguard STAR Fund - The Beginner’s Best Bet

The time has finally come for me to take my dive into the world of investing. This weekend, I’ll be opening my Roth IRA with Vanguard and investing my money in the Vanguard Star Fund (VGSTX). J.D. of Get Rich Slowly wrote a helpful article - “How to Start a Roth IRA (and Where to Do It)” which opened my eyes to what’s available. J.D.’s article featured “The Big Three”:

Fidelity Investments offers a no-fee IRA. There’s a $2,500 minimum initial deposit, but this is waived if you commit to $200/month automatic contributions. They offer 4,500 mutual funds, about a quarter of which have no transaction fee. In short, you can open a no-cost IRA at Fidelity with a $200 starting investment if you invest in mutual funds and you agree to contribute $200/month. Apply for a Roth IRA with Fidelity.

It’s also possible to open a no-cost Roth IRA at The Vanguard Group. To do this, you must elect to receive electronic statements and start with $1000 in the company’s STAR fund. (The STAR fund is an mutual fund of mutual funds, a safe choice for beginners.) Additional contributions require a minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50. There are no fees to purchase the STAR fund. Start a Roth IRA at Vanguard.

T. Rowe Price charges $10/year for Roth IRA accounts until you have a balance above $5,000, after which there is no fee. You need $1,000 to open your IRA, but this minimum goes away if you sign up to contribute at least $50/month with the Automatic Asset Builder. There are no sales fees or commissions to invest this money in T. Rowe Price mutual funds. Open an IRA at T. Rowe Price.

All these investment houses are great choices for the beginning investor, but I’ve always been somewhat infatuated with Vanguard and decided to hold out until I could hop on the Bogle boat. What attracted me to Vanguard is their low expense ratios and great overall performance. Now the STAR fund may not be that impressive, but it’s great for the beginning investor who doesn’t have much money to initially invest. With regular deposits, your Vanguard STAR fund is a great stepping stone to the higher priced Target Retirement Funds which require a $3000 minimum. My projected date to transfer out of my STAR Fund into a Target Retirement Fund is January 2009. How’s that for a goal? In the end, you can’t go wrong with what you choose. Do your research and find out what suits you best.

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