Author Topic: Vanguard index funds Q from a n00b  (Read 2202 times)


  • Bristles
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Vanguard index funds Q from a n00b
« on: January 27, 2014, 02:19:10 PM »

I am pretty uninformed when it comes to investing. I have done a couple good things such as maxing out my employer 401(k) contributions and recently increasing my monthly contribution to a Roth IRA. Otherwise, I know very little. It seems like the MMM posts that say to use Vanguard index funds are very topical and don't seem to go too deep unless I am missing something.

Get all of your eye rolling out of the way now...

Here's what I would like to know. If you have an account through Vanguard...

- How much do you typically contribute (per month I assume?)

- MMM says he's essentially living off the payouts from his fund(s). How much is necessary to get in there (ballpark) to reach FI?

- How frequently do these accounts pay out (i.e. monthly, quarterly, etc.)?

- Are there restrictions on how often you can add, remove or alter your account(s) in any way?

- If you're dumping tons of money into these, are you comfortable with the risks, if you perceive any?

Thanks in advance.


  • Magnum Stache
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Re: Vanguard index funds Q from a n00b
« Reply #1 on: January 27, 2014, 02:24:19 PM »
I contribute weekly, that way I am more likely to make sure that I am investing. Right now it is about $500 a week, which ends up being about 65% of my pretax income.

MMM states the 4% rule, which means that once you have enough invested that you can live off 4% (or you have 25 times annual expenditures) then you're reached FI.

-That depends on the person. Haven't not reached this point I am inexperienced enough to give a good answer.

-There are restrictions. If you sell a fund, then they will not allow you to purchase it for a period. This is because they want to stop people from market timing. Besides that there aren't many restrictions.

-Yes. There are always risks, but if you have a long-term perspective then the risks are more mitigated. Also when investing in an index funds, you are diversifying many of the risks. There will be off-years of course, but over the long run you will make more money. I don't have the time to research individual stocks and definitely don't have the stomach for it. By using index funds I have a VERY cheap way of getting my skin in the game and not needing to spend a lot of time researching it.


  • Magnum Stache
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Re: Vanguard index funds Q from a n00b
« Reply #2 on: January 27, 2014, 02:31:42 PM »
To answer the question about payouts, it really depends on what you are looking for.

Most Vanguard bond funds have a monthly dividend. Most stock funds are either quarterly or annually. With funds you can choose to automatically reinvest it, or have it converted into your cash account through Vanguard. Additionally you can setup your accounts to make automatic withdrawals, this is sending X amount to your bank account and can be customized to whatever purposes you would like. It really depends on your need. My guess is that MMM has enough cash for immediate expenses and can liquidate part of his Vanguard investments should the need arise. That said, MMM has rental income coming in, so might be fun using just that for daily expenses, whereas other people might need a different setup.

the fixer

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Re: Vanguard index funds Q from a n00b
« Reply #3 on: January 27, 2014, 03:29:59 PM »
MMM's tactic of being able to live off dividends from his Vanguard funds would require much more assets than the 4% rule requires. Dividend yields from VFIAX are not that high. If you want to use the 4% rule you'd need to sell shares periodically in addition to taking cash from the dividends.

Vanguard's selling restriction is that if you sell shares of a fund, they will not allow you to repurchase shares for the next 60 days (or is it 90...?) within the same account. You can still sell some VTSAX in your IRA, then buy the same thing in your taxable account, since for their purposes they are separate. Excessive churn in people's accounts leads to higher costs for Vanguard, and this tries to limit that.

Vanguard used to have 1% redemption fees on some funds if you sold the shares within a certain period of owning them, like 1 year. They don't have these anymore on the funds I invest in, but it's possible there's still a few obscure ones out there with this caveat.

Other "restrictions" are based on optimizing taxes; you can break them but Uncle Sam will want a higher cut. I'll summarize them here, not necessarily 100% accurately. Don't buy fund shares then sell them immediately around a dividend payment date, since this will require you to pay a higher tax on the dividend you got. Don't sell shares for a gain that you bought within the past year. Don't sell shares for a loss if you bought any "substantially identical" shares within a 60-day period around the sell date or it will be a wash sale and you won't be able to claim a capital loss.