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Choose Index Funds as a Long Term Investment

01.09.2012 by Guest Author //

For young investors these days, there are a wealth of indicators out there that may dissuade them from almost every long-term investment vehicle available. We are told that Roth IRAs can be a bad investment. We see the stock market turning into a roller coaster that is no more predictable than the outcome of the European debt crisis. We hear that any collective savings fund, most notably Social Security, will be long dead and buried by the time we reach retirement. We realize that real estate may no longer be the most prudent investment. And we know that the growing popularity of CDs and Treasury bills translates into lower rate, even long-term.

So what to do? Where to invest? For those of us who are in our twenties and entering the working world under the cloud of economic recession, we certainly want to start putting our savings aside and investing in our future. But every investment vehicle has some glaring faults at the moment.

If we’re investing long-term we want to be thinking long-term, so perhaps a better question would be: which of these currently-unappealing options will recover well and provide the best combination of low-risk and high-return over the course of decades?

History tells us that the answer to this question is an investment in the stock market. Even though the market has been wildly unpredictable as of late, and even though it has gone through decade-long periods of stagnation in the past, the stock market has never failed to gain over time. As the world population continues to grow, developing countries continue to develop, and new industries and cultures rise to prominence, there is little doubt that the market – as an indicator of the overall economy – will show vibrancy over the next half century.

But it is important that your investment in the market is adequately diversified so as to reflect its role as an indicator of the global economy. Here is where index funds and ETFs come into play: rather than buying stocks you deem strong and profitable, switching between solar energy firms, tech stocks, and financials as the market dictates, your best long-term bet is to invest in the economic system as a whole. This means buying no-fee index funds that capture the full system – funds that track the S&P 500, for example, or funds that provide a snapshot of the London Stock Exchange.

Buying index funds allows you to invest for the long-haul without to constantly check your portfolio or worry that you won’t gain value over time. Doing so allows you, despite the current market conditions, to start saving for retirement at the most opportune time in your life – the present.

Categories // Investing Tags // index funds, Investing

Considering ETF Investing and Mutual Funds

03.25.2010 by Guest Author //

This is a guest post by Neal Frankle.  He blogs over at Wealth Pilgrim about how to find balance in your financial life.  When you finish reading, please consider signing up for his daily posts?

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.

What is your investment strategy?

Well… are you ignoring an entire population of funds at your own expense?  Do you struggle with the decision?  Do you dismiss mutual funds outright because of the expense and tax issue?  Let us know…

Categories // Investing Tags // etfs, index funds, Investing, mutual funds

My Birth as an Investor

01.12.2010 by Matt Jabs //

Hi.  My name is Matt… and I’m an investor. (“Hi Matt.”)

  • Yes I have begun investing.
  • Yes I still have debt.
  • No I have not abandoned my stance on debt reduction before investing.
  • No I have not slowed my aggressive debt reduction strategy.

So what gives?

Why did I begin investing while still in debt?

In a sentence… to better prepare myself for my future as an investor.

There is no doubt that debt repayment is the best investment opportunity currently available to me, and that is why I continue to use all available funds to do just that.  Well, all available funds with the exception of $600 and all Lending Club affiliate earnings.

Where am I investing?

1.  Index Funds with Schwab.com

A few days back I moved $600 of my side hustle earnings into my Roth IRA Account with Schwab who allows beginning investors to start investing with $1,000 or less.  I did this for several reasons:

  1. I cannot max out my 2009 Roth IRA contribution this year, but wanted to contribute at least something… so I did.
  2. Schwab has very low mutual fund investment thresholds, and I wanted to take advantage of the opportunity while it still exists.
  3. I have turned myself into an avid student of investment theory and wanted to use actual money to put that knowledge to practice.
  4. I wanted to get my basic portfolio diversification strategy in place so that when I am ready to invest regularly I can just initiate automatic contributions and stand confident behind my choice of funds.

With help from my friend and blogging colleague Mike Piper (aka The Oblivious Investor) I chose a modified (index fund) version of #7 of these 8 lazy etf portfolios:

  • 30% in Schwab S&P 500 Index Fund (SWPPX)
  • 30% in Schwab Small-Cap Index Fund (SWSSX)
  • 30% in Schwab International Index Fund (SWISX)
  • 10% in the Schwab Total Bond Market Fund (SWLBX)

2.  Lending Club Affiliate Earnings

Investment portfolios are not the only thing we should be diversifying!  Our income should be diversified too.  I hold to this philosophy when monetizing Debt Free Adventure by using as many revenue sources as possible.

One of those revenue sources is Lending Club.  Each month, the earnings from Lending Club are simply deposited into my Lending Club investors account where then put them to work accordingly.

  • I currently have $300 invested in Lending Club notes and hope to see this amount increase nicely over the next few years.

If I had less debt and more cash flow I would be investing much more with Lending Club.  My confidence in LC as an investment vehicle grows as I watch seasoned investors continue to make great returns on their money month after month.

I you are interested in investing with Lending Club:

In closing…

I hope to realize some decent returns from my Lending Club investment while my Schwab Roth IRA account is more of a placeholder for now.  I should also add that neither of the amounts used to fund these investments were taken from our budget; they were taken from my side hustle earnings, allowing me to fund the investments without having to alter our existing budget in any way.

Any thoughts or opinions on my decision to begin investing?

photo by Sir Mervs

Categories // Investing Tags // index funds, Investing, Lending Club, roth ira, Schwab

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Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

Popular Posts

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Disclaimer

Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

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