etfs Archives - Live Debt Free

My bad debt is gone… now what?

People often ask me how to get started investing once they’ve paid off their high-interest debt. My usual answer: Open an IRA, and start building a diversified portfolio of low-cost index funds.

The catch, of course, is that many index fund companies have large minimum investments. Fidelity index funds have a $10,000 minimum investment, and Vanguard index funds require $3,000 up front.

Matt’s note: Betterment offers a great way to invest and have no minimum balance requirement. Read my Betterment Review for more info.

What if you don’t have $10,000 laying around? Or even $3,000? What if you’re at a point right now where it takes serious work to save/invest $100 each month?

1. Get That Employer Match!

First things first: If your employer offers matching contributions to your 401(k), that’s absolutely Investing Priority #1. An immediate, guaranteed 100% return is not something to pass up.

On occasion, people tell me that they’re not comfortable investing in their 401(k) because they don’t want to put any money at risk in the stock market. To that, I have two replies:

You can probably invest in your 401(k) without putting money in the stock market. I have yet to see a 401(k) plan that doesn’t offer a low-risk investment option such as a money market fund or short-term government bond fund.
For most investors, it’s borderline impossible to reach their financial goals without allocating at least a portion of their portfolio toward stocks.

2. Schwab’s Commission-Free ETFs

Schwab recently began offering no-commission ETFs.

A little background: Exchange-Traded Funds (ETFs) are essentially index funds that can be bought and sold like regular stocks. They typically carry even lower expense ratios than index funds, but you must pay a brokerage commission when you buy or sell shares of them.

The fact that Schwab doesn’t charge a commission on their new ETFs (if you buy them in a Schwab account) makes them a great way to get started investing.

The catch is that their commission-free list doesn’t include any bond ETFs, and bonds are an essential part of a diversified portfolio. So be prepared to fork over a $12.95 commission every time you want to add to the bond portion of your portfolio.

One last point about Schwab: They require a $1,000 minimum initial investment to open an IRA unless you set up a monthly contribution of at least $100. (Automating your investing is a great idea anyway, so this shouldn’t be much of a drawback.)

Here’s the page to open an IRA at Schwab.

3. Vanguard’s STAR Fund

A third option is Vanguard’s STAR Fund, which has a minimum investment of only $1,000 as opposed to $3,000 like other Vanguard funds. The STAR Fund carries a low expense ratio of just 0.32% and a fairly conservative allocation with 62% of its portfolio in stocks and 38% in bonds.

It can be a great way to get started until you’ve accumulated enough to branch out into other Vanguard funds.

Here’s the page to open an IRA at Vanguard.

Just Get Started.

Any of the above options should work well–as should a whole host of other investment plans. The most important thing to know is that when you’re just beginning to invest, how much you invest is more important than how you invest. So get started!

About the Author: Mike Piper is the author of Investing Made Simple. He also blogs at The Oblivious Investor.

ETFs – better than mutual funds?

Mike Piper recently wrote a great piece on ETF investing right here at Debt Free Adventure. In it, he did a super job explaining how they work and how they differ from index funds. If you’re like me, you’ve been reading quite a bit lately about ETFs and why they are or are not better than mutual funds.

Mike makes the argument that since most mutual funds fail to outperform the index, you should buy the index – and the way for you to buy the index is to buy an ETF that matches the index as closely as possible. Mike’s argument is very strong. Having said that, I think there is a very important issue that often gets lost in this discussion. As I see it, the “ETFs versus mutual funds” is a tactical issue. An important tactical issue… but a tactical issue none-the-less.

What concerns me is that folks sometimes make dogmatic decisions about this (and other issues) and fail to consider strategy – and all the alternatives. Here’s what I mean. If your strategy is “buy and hold” – the argument to buy the least cost/better performing vehicle makes all the sense in the world; but what if you aren’t content to “buy and hold”? What if you use a investment strategy like market timing? (Oh, I said it… “market timing”. Bad Pilgrim… very bad Pilgrim!) Believe it or not there are market timing strategies that work.

A case for mutual funds over ETFs

There are millions of people who make money buying stocks – some of which are not buying and holding. There are huge numbers of people who buy funds that are in (what they identify as) stronger areas of the market and refrain from investing in other areas that are weak. There is evidence to support that this strategy can make sense for the right investor. It doesn’t work perfectly, nothing does… but it may be a better fit for investors who want to try to avoid some of the risk and are willing to give up some of the gains. It would be silly for those using this strategy to ignore mutual funds and only use ETFs. Why? Let me give you an example…

One strategy ranks all the funds according to their short-term performance (1 year.) This strategy doesn’t care about expenses, but is actually focused on performance. Since performance is net of fees, it doesn’t really matter what the funds charge investors so long as, at the end of the day the performance is good.

You can see how using this strategy can make ignoring mutual funds outright a silly decision.

It’s sort of like the people who ran baseball in the 30’s and 40’s. They ignored an entire population because of race considerations. As soon as the sport welcomed African Americans on to the field, the performance sky rocketed.

3 Ways to Get Started Investing with $1,000 or Less