The e-mail basically stated that my website is displaying the Vanguard logo, which must be removed immediately due to their endorsement policy. The wording of the e-mail made it sound as though I had stolen the Vanguard logo and was displaying it as my official site logo on every page. It also made it sound as though I were purporting my website as being officially endorsed by Vanguard.

Uh, what??!!

I had to scratch my head as to what in the world they were talking about. Why are they threatening me? I’ve never made any claim that my site is affiliated or associated with Vanguard, and I certainly don’t have their logo in my blog header or anything like that. And then I found it….

Back in March 2007, when I first started this website, I wrote a short post talking about transferring my Roth IRA from American Funds to Vanguard. You can see the post here. It was only the second post I had ever written, and it includes a little Vanguard logo as part of the post identifier. Even now, my site is hardly a blip on the radar compared to the big personal finance blogs, but it was completely obscure back then. So, this is why they decided to threaten me? This stupid little post?!

Even more confused and starting to get angry, I penned a reply to Vanguard’s legal department:

Dear L######,

Yes, it’s true. I wrote a post on my site explaining how much I like Vanguard and about how I had just opened a portfolio there. I wrote that post on March 23, 2007, well over two years ago.

Are you trying to tell me that I can’t give FREE advertising to Vanguard? My use of the image was part of an endorsement post FOR Vanguard. I’m under no impression that Vanguard is endorsing my site. The article I wrote years ago has gone into my archives and is not displayed anywhere near the front page. My readers would have to dig pretty far to find it.

And now you’re sending me a threatening message asking me to remove my free advertising for you? Sure, I’ll be happy to comply. I’ll also be happy to transfer my entire portfolio to one of your competitors, such as Schwab or Fidelity. I’ll also be delighted to actively dissuade my readers from ever considering opening accounts with Vanguard because they attack bloggers simply for recommending them.

The ball is in your court.

Signed,

A customer (for now)

Weeks went by and I never heard a response, nor did I delete the image, so I assumed that someone at Vanguard had simply made a mistake and that it wasn’t worth picking on lil’ ol’ bloggers like me. Weeks turned into months, and I completely forgot about the whole ordeal.

Until today. This morning I received a second threatening e-mail from the same person at Vanguard’s legal department. It was a follow-up from the previous correspondence since I had not resolved the issue to their satisfaction. This e-mail was even more forcefully worded, explaining that the Vanguard logo was a highly protected asset and that they will go to great lengths to protect it (obviously). If I try to resist, my puny website and I will be crushed by the towering might of their legal department.

Unbelievable. I’ve been a happy Vanguard customer for years, and because I wrote a post back in early 2007 promoting Vanguard and attached their logo to it, they’re willing to pursue legal action against me? With friends like that….

Naturally, I had to send a response:

L#######,

Congratulations! Vanguard has forever lost a longtime customer! I will be transferring my accounts to Schwab immediately. Not only that, I will do everything in my power to dissuade other people from ever depositing a single penny in a Vanguard fund.

You make it sound like I’ve been using the Vanguard logo as my personal logo. Nothing could be farther from the truth. I put a low-resolution copy of the logo as an identifier in my post PROMOTING Vanguard. That was only the second post I had ever written for my site, and it quickly disappeared into the archives, so I suspect only two or three other people have ever seen it. I will remove it, but Vanguard has now gained a lifelong enemy.

So this is what you do with your time at Vanguard? You search the Web for small-time personal finance bloggers and attack them for daring to promote your company? Pitiful. Since you seem to enjoy it so much, here’s some more fodder for you:

1) http://arsicles.com/2007/10/31/ultimate-financial-lifestyle-guide-part-1
2) http://www.jalbertfinancial.com/useful_links.htm
3) http://www.bloggingstocks.com/2009/09/06/technical-trade-5-vanguard-ftse-all-world-ex-us-etf-veu/
4) http://www.mymoneyblog.com/archives/2009/06/vanguardadvantage-all-in-one-checking-account-at-vanguard.html

Bon appetit!

Brian

I doubt I will receive a response, unless they actually decide to sue me. This entire situation is asinine, and I offer my deepest apologies to the owners of the above sites if it actually causes the wrath of Vanguard to come down on you! I just did a quick Google search for their logo and those were the first four that I found.

As for me, I don’t have the resources to fight their legal department, so I’ll delete their image from my server. Eventually. In the meantime, I’ve already opened a Roth IRA at Schwab and will start the account transfer process from Vanguard later tonight. It’s really a shame because I’ve been happy with Vanguard, but I now retract anything nice I’ve ever said about them. Any company that goes to this length to attack individuals for writing a promotional post doesn’t deserve my business, nor anyone else’s.

So, if you have a personal finance blog and you’ve ever used the Vanguard logo as part of a post, watch out! The Vanguard legal department shark is cruising the Web, smelling blood, and will mercilessly attack you if they find you.

This time, not so much. Sure, I still have those nostalgic feelings on a personal level, but economically, I’m ready to kick 2008 to the curb. As painful as it is, here is how my meager portfolio fared for 2008. Suffice to say, it got pummeled.

All of my mutual funds are held at Vanguard. I like them for their simplicity, consistently low expense ratios, and selection of no-load index funds.

Retirement – Roth IRA

Here’s an overview of my Roth IRA. I started contributing to it in 2007, so there’s not a ton of money in it yet, and there’s even less after the brutal beating of 2008.

The yellow line is what I have contributed, while the blue line show its actual value. That huge dip in late 2008 is depressing, but perhaps the upward curl at the end is a foretaste of the feast to come? Maybe I’m just optimistic….

Here’s a comparison of year-end values:

At the end of 2007, my Roth IRA had just over $9,000 in it. Fast-forward one year, and my Roth IRA has… just over $9,000 in it. Had I not maxed out my contributions for the year, this would not be so depressing. As it currently stands, all my contributions for the year disappeared. That’s okay. This is long-term money, right? RIGHT?

Taxable Mutual Funds

In addition to my Roth IRA, I also have a meager selection of mutual funds in a taxable account at Vanguard. These funds are not quite as aggressive, but they have still taken a nice pummeling.

Once again, the yellow line represents my contributions, while the blue line represents the current value. Things were going pretty well until the bottom fell out in mid-2008. Phooey.

Here’s a comparison of year-end values:

Yet again, the value of my taxable portfolio ended slightly up, but when one considers the contributions that I made, depression sets in.

All together, my Roth IRA is about -41% into the red for the year, while my taxable funds are about -24% into negative territory. Ouch.

Care to share how much your portfolio has been bruised by the Great Portfolio Pummeling of 2008? Misery loves company, so I’d love to hear that I’m not alone.

Here’s to a better 2009!

I’m embarrassed to admit that I thought you could only open 529 plans after you had a child. I was wrong, so here are five reasons why you should open a 529 account right now if you don’t already have one:

1. You don’t need kids to open a 529 account. In fact, you can open an account for yourself, for your spouse, or for whomever you please. With a few clicks, you can change the beneficiary at any time.

My wife and I opened accounts for ourselves even though we’re both nearing the end of our terminal degrees. Essentially, I plan to “launder” money through the 529 accounts – I’ll dump in some cash, let it grow tax free, and then use it for the remaining education expenses that we have. Whatever is left in the accounts will begin compounding away for any children we might have in the future. Yes, I’m kicking myself that I didn’t start doing this sooner!

2. Money grows tax deferred at both the Federal and State levels while in the account. Provided that you use the withdrawals for qualified education expenses, the earnings are also tax free. So, what are qualified distributions? Many things, including tuition, campus fees, meal plans, room and board, books, and other required equipment. Provided you can prove that it somehow relates to education, most anything goes. Yes, a laptop computer counts. No, a semester’s supply of iced mocha lattes probably does not!

3. You may be able to claim a state income tax deduction. Some states allow you to claim contributions as income deductions. For instance, the Kansas plan that I use allows me to claim an annual adjusted gross income deduction of up to $3,000 ($6,000 if married, filing jointly) for contributions per beneficiary, per year.

So, not only do I get an upfront state tax break, provided I use the money for qualified education expenses, the earnings are tax free. It’s the best of both worlds.

4. YOU remain in control of the account, no matter the name and age of the beneficiary. Money that you contribute to the account remains YOUR money until you decide what to do with it. If the named beneficiary decides to drop out or skip college entirely, he or she cannot access the funds. The money is then yours to do as you will. Pay the tax penalty and withdraw it all, or simply change the beneficiary to another family member without penalty. Also, all funds in a 529 are sheltered from bankruptcy (in case you run into financial hardship later).

5. Low minimums, high maximums, and low expense ratios (provided you shop around). Depending on the plan, you probably won’t have to commit much money to start the account. The Kansas plan that I chose only has a $250 minimum (Kansas residents only; $1000 for outside residents), or you can open the fund with an automatic monthly contribution of $50 ($25 for Kansas residents).

Keep in mind that you do NOT have to settle for the 529 plan offered by your state. You can open or contribute to any 529 account, no matter the host state, though you may not be able to claim a state tax deduction if you do so. As a Kansas resident, I can invest in any state-sponsored 529 plan and still claim a Kansas tax deduction – be sure to investigate how your own state operates. However, if your state’s plan does not offer a tax deduction at all, please shop around to find a plan with funds and expense ratios that suit you. Speaking of which….

I was pleased to see that the Kansas 529 offering includes Vanguard funds. It’s no secret that I’m a fan of both Vanguard and Index funds, so in my case I opted for the Total Bond Market Index Portfolio, which has a total expense ratio of 0.25%. Unbelievably, this is an even-lower expense ratio than if I were to invest in the same fund from within the Vanguard 529 Portfolio itself (expense ratio – 0.55%)! In any case, be sure to consider the expense ratio (and any other fees) for any funds in your 529 account. Lower is better. The Kansas plan has no fees other than the expense ratio. If your state’s plan has hefty expense ratios plus annual fees, RUN!

Also, the maximum contribution limit for 529 accounts is quite high, usually around $300,000 per beneficiary. As a poor grad student, I can’t imagine having that much money right now, but it’s nice to know that the sky is practically the limit.

One last thing that I want to add: while I think 529 plans are great, I suggest maxing out your IRA before contributing to a 529. In other words, a student can always apply for scholarships and financial aid, but there are no scholarships available for retirement!

Further reading:

The Essential 529 Guide – http://www.savingforcollege.com

529 Plans – Wikipedia link

Just stick money in the fund(s) and FORGET ABOUT IT. Resist the urge to log in and check it every day. You’ll only give yourself ulcers!

I think it’s terrific… fantastic… nay, stupendous advice! There is just one problem:

I have not been following that sage advice lately!

I’ve owned mutual funds (at Vanguard) for a couple years now, and most of the time I only pay attention to them when I want to buy more shares.

A Bad Habit

I must confess – when the bottom started falling out of the stock market back in January ’08, I began a regretful habit of logging into my Vanguard account every evening to survey the damage. I did it first out of wonderment, then amazement, then fear, and finally disgust. Now it has become a habit!

Most of my Vanguard assets are in index funds, most of which have taken a severe beating since the beginning of the year. However, I am proud that I have not sold a single share, despite the volatility. The current value of my shares have decreased, but I still own the same number. In essence, I have not lost anything.

I’ve actually used this opportunity to scoop up a few more shares, as if they are “on sale.”

Still, it’s awfully depressing to watch a value that drops almost every day, even if the loss is unrealized. Yes, I realize how silly and foolish it is to check on my mutual funds frequently. No good can come from it. It’s a waste of time and energy.

That’s what I keep telling myself, yet I continue to log in and gawk every evening! It’s as if I’m witessing a train wreck in-progress and can’t look away.

My Pledge

At this point, I fully intend to follow that sage advice my wise friend gave me. Therefore, I refuse to log into my Vanguard account for at least a month. Let’s make it April 15th.

I don’t need the money in my index funds anytime soon, and I can’t afford to buy anymore shares for a little while, so I have absolutely no need to sneak a peek at my account. No reason at all. Not going to do it.

I intend to kick this ridiculous daily-checking habit of mine and reset it more along the lines of monthly-checking.

How about you? Have you found yourself sitting on the edge of your seat and biting your nails as you watch your long-term investments plummet? If so, you are welcome to join me in NOT logging in again for at least a month!

It doesn’t seem fair to indirectly punish someone who currently makes little money from taking advantage of tax-free growth. For example, suppose a full-time college student with a part-time job hears about the benefits of a Roth IRA, but can’t scrape together the initial investment amount to open an account at a place like Vanguard or Fidelity. What then are his/her options?

Option 1 – Keep Saving

Of course, you can just keep saving a little bit every month until you DO reach the required minimum at your company of choice. Scheduling an automatic weekly or month transfer into an online savings account can help. You can even try taking advantage of a few bank or credit card sign-up bonuses to help expedite the process. Once you reach $1,000, your choices begin to broaden.

Option 2 – Local Banks

Another option is to visit a few local banks and ask about opening a no-minimum IRA. Many banks offer IRAs that utilize a money market or a CD. One disadvantage is that you may only have a short “window” each year in which you can invest additional cash. Plus, if you are young, a CD or money market is a very conservative investment. A mutual fund is better more suitable if you have decades to invest before you retire.

What then, are some choices involving mutual funds?

Option 3 – Fidelity

• Minimum required to open an IRA: $2,500
• Minimum requirement waived if you agree to a $200 per month automatic transfer.

As you can see, Fidelity requires a pretty steep commitment to open an IRA, but offers a SimpleStart option that waives the minimum amount. This feature is nice, but our example college student may not be able to scrape together $200 every month. However, if you can afford this monthly transfer, Fidelity is a great choice. Otherwise, let’s look at some alternatives, shall we?

Option 4 – T. Rowe Price

• Minimum required to open an IRA: $1,000
• Minimum requirement waived if you agree to a $50 per month automatic transfer.

T. Rowe Price’s IRA offerings are a little more suitable to those with a small initial investment, although the $1,000 minimum is still higher than desired. However, if you can afford the $50 per month automatic transfer, T. Rowe Price is another great option. I suggest looking into their SmartChoice IRA Funds, which are targeted toward a specific retirement year.

Keep in mind that T. Rowe Price charges an annual custodial fee of $10 for all IRAs that have balances lower than $5,000.

Option 5 – ING Direct

• Minimum required to open an IRA: $250
• Minimum requirement reduced to $25 if you agree to a $25 per month automatic transfer

Now we’re talking! Due to their recent acquisition of ShareBuilder, ING Direct has recently started offering mutual funds and retirement accounts, and the $250 minimum is ideal for someone starting a Roth IRA on a budget. If that amount is still too high, you can open an account for as little as $25 if you agree to a $25 per month automatic transfer. Even a college student with a part-time job should be able to afford that!

All is not well in the land of ING, though. For starters, they charge a $10 annual custodial fee on IRAs, no matter how much you have invested. Please see their Fund Fees and Minimums page. Not only that, the expense ratios on their 15 funds are higher than average. As of this writing, the expense ratios range from 0.61% (Money Market Fund) to a whopping 1.75% (Global Science and Technology Fund)! Not sure what an expense ratio is? See here.

Don’t let me dissuade you. This would be a fine “starter” account, but I would consider transferring to a different company with lower expense ratios once you have accumulated $2,500 or more.

Option 6 – E-Trade

• No account fees or minimums (when you sign up for online statements and confirms)

And here we have what is perhaps the best deal yet. E-Trade offers the option to start an account with no minimum, provided you agree to receive all communication online rather than through “snail” mail.

E-Trade has a massive amount of funds (over 7,000), and there have been worries about bankruptcy, so this choice may be intimidating for a beginning investor. Still, considering that there is NO minimum, it is a viable choice provided that you are willing to do your homework in deciding which funds are right for you.

If in doubt, I suggest going for one of the no-transaction fee, low-expense ratio funds, such as their S&P 500 Index Fund.

Other Thoughts

Of course, this list is not comprehensive, as there are many other options and companies available. No matter which option you choose, contribute as much as you can, and your nest egg will continue to grow tax free.

My own IRA is currently held at Vanguard, but the initial investment minimum for most funds there is $3,000. The only exception is the STAR Fund, which requires only $1,000. Once you reach the 3k threshold, you may consider transferring to Vanguard, as it is a solid company with consistently low expense ratios.

Of course, my disclaimer is that I have attempted to provide entirely accurate information, but please make sure to do your own research before investing. I hope that the information I provide is valuable, but please leave a comment below if you find an error or would like to suggest another offering. We can all benefit from that knowledge.

Happy investing!

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Guess what? I don’t care. Ever since I simplified my setup, more of my spare cash is going into a diversified set of mutual funds. Since fretting about savings rates will do absolutely nothing to actually change them, I’ve decided not to worry about them at all.

In fact, dropping interest rates have encouraged me to invest more money into mutual funds. Sure, there is more volatility involved, but the potential returns are much higher, especially over the long term. Aside from my modest emergency fund, I don’t plan to touch my small hoard of cash for the next few years. Therefore, I will stick that hoard into some mutual funds and try my best to forget about it until at least 2009.

The moral of this tale is to keep your eye on the big picture. The market has ebb and flow, but fix your sight on the horizon. Though savings rates may now be the lowest they’ve been for years, they will rise again. After all, it’s in the banks’ best interest to offer high rates because there is more money to be made.

No matter what happens in the short term, keep this in mind: the path to (eventual) financial freedom may be windy and arduous, but two simple tricks will keep you on track:

1. Save a little money every month. Whether it’s 5%, 10%, or 25% (wow!), reserve a small amount of your income as an investment. Make it automated for best results.
2. Take that reserved money and invest it into a low-cost mutual fund, such as an index fund (or perhaps a Target Retirement Fund – which is often a pre-packaged portfolio of index funds.). Put as much as you can into a tax-deferred (or tax-free!) account, such as an IRA.

Let the Fed slash and burn. As long as you keep those two principles in mind, you are bound to come out ahead.

Old fee structure

• $10 per year for each index fund with less than $3,000 invested
• $10 per year for any fund with less than $2,500
• $10 per year for an IRA with less than $5,000

As of today, this changes.

New fee structure

• $20 per year for each fund with less than $10,000 invested

Simple, huh? “But wait a minute,” you say, “this actually looks worse for the starting investor than before.” At a glance, this looks to be the case.

HOWEVER, you can avoid the service fee entirely by simply enrolling in online delivery of statements! Vanguard will begin assessing the service fee in June, so choose online statement delivery soon to avoid all fees. I updated my preferences a few minutes ago.

I think this is great news because I’ve been intending to diversify my lineup of funds for a little while now, but did not want to pay extra fees for having low balances. For example, I would like to add a couple extra index funds to my non-retirement portfolio, which currently contains mostly the Total Stock Market Index fund (VTSMX). If I add two extra index funds, such as a small-cap fund and an international fund, and each of these funds has a balance lower than $10,000, I will save $30 per year, provided that I stay enrolled in online statements. Sounds good to me.

In summary, Vanguard keeps getting better.

Read the official announcement here.

Preliminaries

If you hear the word “savings,” what images pop into your head? If you’re like most people, you probably think of banks, people in suits, or you get a shiver of anxiety realizing that you don’t have much savings. If the words “mutual funds” popped into your head, then you probably do not need to read this post.

For the rest of us, mutual funds make sense as a savings vehicle for both retirement and non-retirement money. The potential return they offer is far greater than the savings and money market accounts you will find in a bank. Sure, there’s some risk involved, but there’s a lot of truth in the old saying, “nothing ventured, nothing gained.”

Before I continue, allow me to say that I am not a financial adviser. The advice I give may benefit you, or it may drink all the buttermilk in your refrigerator. I’m only disclosing what I would tell a good friend who is interested in setting up a mutual fund account.

Getting started

First of all, you need to have an existing checking or savings account. Once this issue is addressed, decide how much money you would like to invest in a mutual fund.

$1 to $999

For this range, just put the money in a high-yield (5%+) savings account. While it is possible to open a mutual fund with less than that, I don’t really recommend it. For instance, American Funds requires only a minimum $250 opening deposit, but these are “loaded” funds. Not sure what a loaded fund is? See Part I.

$1000 to $2999

In this range, there is one good mutual fund available: the Vanguard STAR Fund (VGSTX). It’s a decent fund that has a $1000 opening minimum and a $100 additional contribution amount.

I’ve said it before, but I really like Vanguard, so I would definitely recommend that “my friend” open an account with them. To do so, create an account on their web site. One can fund the account in a number of ways, but the simplest is to enter your checking account number during the account setup process. This way whenever you want to contribute more money, you can simply log in to your account and send some money over while enjoying a glass of wine on your couch.

The Vanguard STAR Fund is currently comprised of about 62% stocks, 37% bonds, and a tiny amount of short-term reserves.

Naturally, stocks are more volatile and bonds are more conservative, so this mixture should help keep your investment safe while allowing for a moderate amount of growth.

$3000+

Beyond $3000, the choices are much more broad, since this is the threshold of minimal investment into any other Vanguard funds. One simple option is to just stick with the STAR fund. If you think you will redeem that money within the next 6 -8 months, I would keep it all in STAR for simplicity.

If you feel more adventurous, another option is to exchange shares into something a little more aggressive. If you go this route, I recommend index funds because of their low expense ratios. One good candidate is the Vanguard Total Stock Market Index Fund (VSTMX), which seeks to mirror the overall US stock market. Remember that this particular fund is comprised of 100% stocks, so when the market does well, so will the index fund. When the market suffers… well… you get the point.

You could also do a combination of the two options: transfer $3000+ into an index fund and keep the rest in STAR. This option will give you a large exposure to stocks while keeping a few bonds to help offset any losses.

Other Thoughts

Of course, these choices are by no means exhaustive, but should help give someone direction. I keep my non-retirement savings mixed between high-yield bank accounts and mutual funds. Right now the balance is slightly heavier on the high-yield side because I’m hoping to buy a house in about a year, and the last thing I want is the market to tank a month before my purchase. Once I close on the new house, I’ll go much more aggressive.

Anyway, that is what I would tell a friend for advice on starting with mutual funds. Don’t just take my word for it, though. Please do your own research to determine what choices are most suitable for you. Agree? Disagree? Feel free to comment below. Good luck!

As I mentioned previously, I recently moved my Roth IRA from American Funds to Vanguard. When I transfered, I placed all my money in the Vanguard STAR Fund (VGSTX) initially, which only requires a $1,000 minimum. Recently I contributed enough money to break the $5,000 mark, and this was my signal to exchange the money into a different fund.

I chose the Target Retirement 2045, which is an all-in-one portfolio. It’s currently comprised of almost 90% stocks, making it very aggressive.

The three largest holdings in this fund are:

• Vanguard Total Stock Market Index Fund
• Vanguard European Stock Index Fund
• Vanguard Total Bond Market Index Fund

That’s a decent breakdown. When I eventually have about $50,000 in the fund, perhaps I’ll split it into a few different funds of my choice, but I like the current holdings.

What I like about the Vanguard Target Retirement Funds is that they start aggressively, but as the years pass they gradually become more and more conservative, thereby helping you keep keep more of your earnings. Best of all, the adjustments are done automatically, allowing the investor to “add money and forget about it.” Since I’m in my 20s, I have lots of time to let the money compound away.

Mutual funds can be an intimidating investment for the beginning investor, especially for the type of person who seeks safety in banks. Just last year I was content to allow my savings to stagnate in a local bank earning 1.2% interest, which is PATHETIC! A friend convinced me to try mutual funds, given that the potential return is greatly augmented over any bank, but I was intimidated since you can lose money.

Let’s get one thing straight: Yes, you can lose money with mutual funds. In fact, you are guaranteed to, at least in the short term. The market fluctuates daily, and the value of your funds will go up and down on a daily basis as well.

First things first – there are two broad categories of mutual funds.

Loading versus no-loading:

Funds that make you pay an upfront fee whenever you buy shares are considered “loading” funds. For class “A” shares, that fee can be a nice chunk of change. American Funds currently charges a 5.75% load for each fund. Loads are mostly paid to the financial adviser, so most advisers like to “push” these funds over others, naturally. By contrast, all of the funds at Fidelity and Vanguard are “non-loading.”

Class Types:

Only “loaded” funds have classes. Class A means “front” loading – pay the load when you buy shares. Class B means “back” loading – pay the load when you sell. Class C means “continuous” loading – pay some of the load every year and probably some more when you sell. Non-loaded funds don’t have separate classes. You just simply buy shares of the fund, which is much simpler to me.

Maintenance fees:

All mutual funds have annual custodial fees. This, after all, is largely how the fund companies stay in business. To make money for all their time and effort in organizing the various funds, each fund has an expense ratio. Each year they deduct a small percentage from your funds to pay for their service and organization. This makes perfect sense to me, but where you have to be careful is in the height of the expense ratio.

Expense ratios vary between companies (and even between separate funds). For instance, the Growth Fund of America (at American Funds) has a 0.63% expense ratio, which isn’t too bad. On the other hand, the New World Fund (also at American Funds) has a solid 1% expense ratio. In this latter fund, the 1% expense ratio means that American Funds removes $10 for every $1000 you have in the fund each year. Keep in mind that the expense ratio is on top of any “load” that you have already paid.

Enter Vanguard. I currently have two non-retirement mutual funds with them. One is called STAR fund, which is a fairly-balanced fund (about 38% bonds, the rest are in stocks). It has an expense ratio of 0.35%. The other fund is a Total Stock Market Index fund, which is more aggressive. Its expense ratio is a mere 0.19%, meaning they only take out $1.90 for every $1000 invested each year. Nice!

To illustrate, if I put $10,000 into the New World Fund versus something like the Extended Market Index fund at Vanguard, in the first year American Funds would take out a total of 6.75% (load plus expense ratio), leaving me with $9325. Yikes! Vanguard would take out 0.25% over one year, leaving me with $9975. While New World Fund might have the potential for a higher return, the Vanguard fund has such a head start that it would be hard to catch.

Shares and shares alike

In addition to expense ratios, when looking for a mutual fund take a look at the cost of each share. Remember that you are purchasing shares of a fund, so you ideally want a current low share price. If I invest $10,000 in a fund whose individual share price is $100, that means I only bought 100 shares. If the price of each share goes up 8 cents one day, that means I only earn $8 that day.

If someone else invested $10,000 in that same fund a few years prior when individual shares were only $50 each, that person owns 200 shares. If the price of each share increases by 8 cents, he earns $16, twice as much as me. See now why it’s important to keep in mind the total number of shares you own versus the total value?

Any specific advice?

Yes. If you’re just getting started with mutual funds, I recommend looking at non-loading funds, such as those offered by Fidelity or Vanguard. If you can’t tell, I really like Vanguard, but I’m sure Fidelity is just as good. Look for a fund with a low expense ratio. Most “index” funds at Vanguard offer low expenses, but are best if you can invest at least $10,000. Otherwise, they deduct an additional $10 per year. In reality, this is not such a big deal, especially if you are regularly contributing to the fund. (UPDATE: Vanguard has eliminated fees for low balances, provided that you choose to receive online statements.) I own one index fund, and I’m nowhere close to $10,000 yet, but I hope to be within the next year or two.

Almost every Vanguard fund has a $3,000 minimum investment per fund. If you do not have that much yet, you only have one choice: the Vanguard STAR fund, which has a $1,000 minimum investment. I first bought shares of STAR because I was intimidated by mutual funds in general and did not want to jump in all at once.

You can see a current list of all Vanguard funds here, along with their share prices and earnings.

Final Thoughts

No matter what fund you choose, buy shares of it and forget about it. Resist the urge to check it daily to see how much you gained/lost. The funds I own have earned at least 10% since inception, so no matter the short-term ups and downs, it’s better to focus on the long haul.