There is nothing wrong with hiring a Certified Financial Planner (CFP) and if you do I’d recommend one with a fiduciary responsibility.
What I’m not okay with is hiring a CFP because of a lack of investment knowledge. If hiring a CFP is in your best interest, you should hire someone who shares your beliefs/strategies about investing. That means first you’ll need to understand the basics of investing. My advice is to NEVER invest in something you don’t understand. It’s your money and you want it to work for you.
You took the time to make it, now take the time to learn what it can do for you.
I’d say the main key to gaining knowledge on investing 101 is a genuine curiosity. There are a plethora of resources out there in the form of books, articles, and podcasts. Google personal finance and/or search personal finance in your podcast app. Find one that speaks to you and dive in! Here are two I recommend to get started:
The best book I’ve read on investing is JL Collins, A Simple Path to Wealth.
A lot of my knowledge has been self-taught through reading, listening, calling Vanguard, and just trying stuff out. My hope is that my writing can help make this stuff less intimidating.
In this article, I’ll share how I’ve settled on passive investing and have learned to navigate Vanguard’s options of funds. My research has been specific to Vanguard because that is what I have available through my employer. However, there are other venues out there, so I’ll try to keep some of my suggestions general so they can be applied to other platforms.
Funds Versus Single Stocks
I don’t know about you but I don’t have too much extra time to study stocks and time the market, which BTW is impossible. Part of me is interested is studying single stocks but, for now, I’ve decided that my time is better served elsewhere.
That being said I’m choosing to buy mutual funds or Exchange-Traded Funds (ETFs). The glory of these funds is you gain ownership in a bunch of companies and get some diversity.
A good way to think about this diversity is to imagine this simple example. Let’s say you buy 100 shares of a particular mutual fund which is made up of 20 companies and so you now own a little bit of each company. Perhaps two companies fail and so you lose 100% of those shares. Maybe 15 companies succeed averagely but 3 companies really flourish. The most you can lose on the ones that fail is 100%, but the sky is the limit on the growth of companies which are doing well!
When you own shares of multiple companies you can stomach the risk of a few failures.
Actively managed funds are often more complex and certainly, have a higher expense ratio as you are paying someone to manage your fund.
Index funds are simple, have a lower expense ratio and often out-perform actively managed funds. Index funds are what Waren Buffet is advising his heirs to do with his estate. He is a smart man. Index funds are my choice.
According to Wikipedia, An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allows for greater tracking error, but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.
Check out this lesson from David over at Fiology.com for more resources on passive investing.
Equities and Bonds
You can buy funds solely comprised of equities or bonds. You can also buy funds comprised of both such as Target Retirement Funds (TRFs). TRFs are the simplest form of passive investing as they rebalance to be more conservative as you approach your retirement age.
Equity (or stock) is defined as the value of the shares issued by a company. When you buy an equity you own a share of the company.
Bond is defined as a debt. As an investor buying a bond you are loaning your money to an entity for a defined period of time at a variable or fixed rate of interest.
Equities or stocks provide more aggressive growth but that also means they include more risk. Equity index funds are investments for the long haul. You can expect to see many dips, but as history has shown, over the long run they grow.
Bond funds can smooth the wild ride of market investing. Typically bonds and stocks are inversely related, meaning when one goes up the other goes down. The thing to keep in mind about bonds is that they go down when interest rates are rising or during an inflationary market decline. As a matter of fact, both stocks and bonds can go down during times of inflation.
Some ways to hedge against inflation are real estate investments, business investments, and cash. But this is a topic for another article.
What Phase Are You In?
Typically there are two phases when it comes to investments:
- Wealth Accumulation
- Wealth Preservation
Know where you are at and invest accordingly. I’m currently in the peak of my wealth accumulation phase and so I’m willing to be more aggressive and equity index funds are my jam. As I approach the wealth preservation phase, I will allocate more of my money to bond funds as well as cash.
This week I received an email from Vanguard about 119 Vanguard products earning top Morningstar ratings. This is a good place to start.
Otherwise here is a quick and dirty lesson on how to view Vanguard funds and what to look at:
- Click here
- Click on the tab titled, “Investing”
- Choose Vanguard Mutual Funds
- Browse Vanguard funds by asset class
- You can view mutual funds (default tab) or ETFs by choosing the ETF tab (which we’ll talk about in a bit)
The categories I recommend you pay attention to (don’t worry a picture will follow):
- Asset class
- Expense ratio
- Average annual returns (1 yr, 5 yr, 10 yr & since inception)
Things to keep in mind:
- You can filter out certain things
- You can click on a fund to see it’s full profile
Here are a bunch of Vanguard’s Target Retirement Funds (TRFs) that I talked about earlier:
Once you know what you are looking at, it makes choosing much simpler!
ETF Versus Mutual Funds
What is the diff here? Not too much as they both represent a collection of individual stocks or bonds. Vanguard does a great job breaking down the difference so let me point you here first. Go ahead and read the chart, I’ll wait.
Okay, so I have an employer-sponsored Simple IRA and in it, I had a choice of many different mutual funds. For now, I have chosen 100% in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX).
I also opened a Roth IRA and debated between mutual funds and ETFs. Ultimately I chose ETFs and here is why:
- Lower expense ratios
- Lower investment minimums
Mutual funds have a minimum initial investment. When purchasing mutual funds with Vanguard you can either buy Admiral shares or investor shares. Admiral shares have a higher minimum investment. For example, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) has a minimum of $10k and its expense ratio is 0.04%. That is low! The same fund in investor shares has a minimum of $3k and its expense ratio is 0.14%. Still pretty low!
Well check out the ETF of this fund with the ticker VTI:
Its expense ratio is as low as the Admiral Shares but it does not have the same minimum investment. You can buy an ETF for the price of a share. Low barrier to entry and low expense ratio – sold!
With ETFs, you cannot make automatic investments like you can with a mutual fund; however, it’s not hard to transfer the money and buy the ETF. I called Vanguard and they walked me through it.
I actually bought the Vanguard FTSE Developed Markets ETF (VEA) in my Roth IRA as I was interested in having some international funds. As I continue to max out my Roth IRA for 2018, I will choose some other funds.
Here is a picture of VEA’s portfolio composition. This level of information can be found by clicking on the actual fund. Follow the directions above and click on a fund that interests you.
I think TRFs are a really great method of passive investing. You can set it and forget it. I’ve been enjoying picking the different funds so I have chosen to go this route but who knows I may switch to TRFs at some point.
You can switch your funds fairly easily without creating a taxable event. I’ve always called Vanguard to have them do this when I’ve switched funds.
It really doesn’t take a lot of time to understand the basics of investing. I think what held me back for a while was a fear of the unknown. However, once I dove in and asked questions, the mystery dissipated.
Certainly, I am not a financial expert and I’m writing from my personal experience. Please see my disclosure statement. Once you’ve taken some time to understand the basics, consult with a professional.
Alright, did you find this helpful? Do you feel less intimidated? I’d love to hear any questions you may have…