Cashola

Words to Live by to Invest Well

If reading investing books isn’t your thing, there are seven words that can sum up how to invest well. Those words, offered by Michael Pollan, are:

Index (mostly). Save a ton. Reallocate infrequently.

The book I’m reading now, Bogleheads’ Guide to Investing, and most investing/personal finance information sources I’ve read point readers in that direction. Index Funds, with lower operating expenses and low portfolio turnover, have generally kept up or even out performed actively managed accounts. If Warren Buffett recommends Index Funds, you better listen! Saving a ton is just common sense. You can’t build wealth if you spend more than you earn. Lastly, Reallocating infrequently (every 6 to 12 months) will discipline you to stick to your guns with your investments, keeping you from impulsive decisions and needless costs. You can read more financial basics offered by Pollan in the full article - Five Basics for Building a Solid Financial Future

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.

Psst! Want to know the best time to invest?

So, you want to know the best time to invest? I’ll tell you. The best time to invest is now! There is no one in the world who has a crystal ball or a little bird that whispers in their ear to tell them whether the market will rise or fall. One of the biggest mistakes investors make is attempting to time the market and using past performance to determine how the market will perform. A majority of investors are better off using whats called Dollar-Cost Averaging. With Dollar-Cost Averaging, an investor invests a fixed dollar amount at regular intervals. For example, my goal will be to invest $400 every month, regardless of how the market may be perceived at the time. Using Dollar-Cost Averaging with Index Funds may be the best advice for most investors to take. The advice doesn’t make for exciting reading, but who cares?!