Mutual Fund Basics – Initial Decisions and Advice

This is the second part of my series on mutual fund basics. Don’t miss Part I on Making the Plunge.

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.
star-allocations.jpg

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!


Author: misterIM

Site administrator. Technology enthusiast. Linux lover. As Martin Luther said of me:

He is the master of the (bank)notes. They must do as he wills. As for the other [finance authors], they must do as the (bank)notes will.

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