Author Topic: What to do with 5K, 10K, 20K <  (Read 20257 times)

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
What to do with 5K, 10K, 20K <
« on: August 14, 2012, 07:11:01 PM »
I have been pondering what I would do after I begin to balance out my debt-to-income ratio (to the point where there is no more debt) and begin to save up a good 'Stash. In many of MMM's posts and guest posts they offer advice for 100,000 or more specifically.

So what is done with the 5k? or 10k? Or to each increment up to 100k?
Options?: Stocks, Bonds, CDs, Money Markets, savings accounts, options, real estate, cash

Do I choose dividends? Is that with or without DRIP? Can you get much gain from Index or mutual funds with only 5-10k? You also have to look at the fees and taxes associated either before or after.

What is frustrating is there is no clear way to have a small amount of money work for you because there is always the chance of a better opportunity that I or anyone could be missing out. Sure you may have the no risk return of dividends from the Aristocrats (until the bubble bursts), but it is probable to gain on a heavy risk option call or put since I am young and can balance out the loss later (only being 23). CDs are about 1.3% for 2-5yrs, money markets are 1%ish, savings account is 1%, real estate is not a choice (maybe for 50k+?).

So as Aragorn son of Arathorn once said to the living dead, "What say you?"

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: What to do with 5K, 10K, 20K <
« Reply #1 on: August 14, 2012, 07:17:36 PM »
In other words, what is the best asset allocation other than diversification? Obviously, there is not much diversification with 5-10k. What then?

Nudelkopf

  • Pencil Stache
  • ****
  • Posts: 899
  • Age: 28
  • Location: Australia
Re: What to do with 5K, 10K, 20K <
« Reply #2 on: August 14, 2012, 07:38:21 PM »
This is a question I'm also very interested in.

I keep my $10K AUD savings (hey, I'm only a student, just turned 21) in a 5% savings account at one of the big banks (Australia). I want to keep it easy to access, since my income varies dramatically throughout the semester/year. (Like, $200/wk during semester, $0/wk during the holidays.)

I've also got $5K AUD in shares (my Dad still kinda tells me what to do there).

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27911
  • Age: -999
  • Location: Traveling the World
Re: What to do with 5K, 10K, 20K <
« Reply #3 on: August 14, 2012, 08:11:47 PM »
The answer to this question absolutely depends on your personal situation.  What is your target AA, when will you need access to the money (a 5k emergency fund is very different than the first 5k of your FI portfolio), what is your personal risk tolerance, etc. etc.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: What to do with 5K, 10K, 20K <
« Reply #4 on: August 14, 2012, 08:54:10 PM »
The answer to this question absolutely depends on your personal situation.  What is your target AA, when will you need access to the money (a 5k emergency fund is very different than the first 5k of your FI portfolio), what is your personal risk tolerance, etc. etc.

It is not an emergency fund, though I would be open to the best place for putting such fund somewhere. OP is more on the beginnings of a FI portfolio. Is there high risk in diversification or asset allocation? Is there a no-risk choice when you only have 5-20k?

What else is covered in the "etc" that may help me provide more information?

tannybrown

  • Stubble
  • **
  • Posts: 118
  • Age: 39
  • Location: South Scottsdale, AZ
Re: What to do with 5K, 10K, 20K <
« Reply #5 on: August 14, 2012, 08:58:45 PM »
A balanced fund (like VBINX) is a quick and dirty way to get some broad diversification with a small amount of money.

To answer your later questions: the point of an asset allocation is to limit risk.  But that said, a "no risk" option is, by default, a "no reward" option.

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: What to do with 5K, 10K, 20K <
« Reply #6 on: August 14, 2012, 09:21:22 PM »
A balanced fund (like VBINX) is a quick and dirty way to get some broad diversification with a small amount of money.

To answer your later questions: the point of an asset allocation is to limit risk.  But that said, a "no risk" option is, by default, a "no reward" option.

So why Vanguard? I know many people keep pushing its funds and services, is there no one better?

I cannot do an asset allocation with 5-10k. The 'Stash would be too thin and the fees would eat up some of it (probably more than I would want to see go). If I just plunge all 5k into one asset class, then there is lots of risk since I do not have anything to balance it with.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5018
Re: What to do with 5K, 10K, 20K <
« Reply #7 on: August 14, 2012, 09:48:46 PM »
Balanced funds are inherently diversified.

If this is long term FI money, I would not worry about the asset allocation of your initial investments.  Maybe buy the total market index, something like VTI (the ETF).  VTSAX, the mutual fund, requires a minimum $10,000 investment, and the ETF can be purchased commission-free if you are a Vanguard customer.  Get some money working there, and spend some time learning about the various asset classes.  As you add to your holdings, look to diversify and try to buy things when they are on sale.

Vanguard is revered for its low fees.  I own some managed funds run by other companies that have performed well over time, better than the Vanguard equivalents.   But Vanguard is a great place to start.

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: What to do with 5K, 10K, 20K <
« Reply #8 on: August 14, 2012, 09:59:48 PM »
Another choice is the Vanguard STAR fund, described them them this way:

"This balanced fund is invested 60% in stocks and 40% in bonds. It offers investors exposure to eleven underlying actively managed Vanguard funds—including domestic and international stock funds and U.S. bond funds—each with its own distinct investment approach. It may be considered a “one fund option” for investors looking for broad diversification across asset classes who can tolerate moderate market risk that comes from the volatility of the stock and bond markets."

This one is specifically designed to give you a lot of diversification in one fund, with a small minimum investment ($1,000).  The expense ratio is 0.34%, so not a whole heck of a lot of fees to worry about.  Pretty much targeted to the small investor who wants "one fund and done".

To expand on Another Reader's response about Vanguard, yes it's the low fees, along with pretty good customer service.  They are essentially a non-profit company, they plow their "profits" into lowering their mutual fund fees and they don't do a ton of marketing and don't charge any sales commissions.  They have some of the lowest expense ratio mutual funds, although Fidelity and T. Rowe Price also have competitive low-expense fund choices. 

Yes some managed funds *can* do better, but the big problem is choosing the "winners"--there has been research showing that 80% of managed funds do worse than the indexes over time, and it's not like the same 20% always beat the indexes, not to mention that funds close, get consolidated, the managers leave, etc.  So the argument goes that lower expense ratios with index/broadly diversified mutual funds will beat actively managed funds, almost all the time over the long term.

This is all assuming that you don't need to spend this money for at least about 5 years.  Anything less than that, go with money markets, CDs, savings accounts, etc.--with the shorter time horizon, the risk of loss (from short term up and down swings) outweighs the risk of losing real value from inflation.  About 5 years out that flips, because the up and down swings start to even out and inflation starts to add up.
« Last Edit: August 14, 2012, 10:06:48 PM by ShavinItForLater »

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: What to do with 5K, 10K, 20K <
« Reply #9 on: August 14, 2012, 10:05:17 PM »
Balanced funds are inherently diversified.

If this is long term FI money, I would not worry about the asset allocation of your initial investments.  Maybe buy the total market index, something like VTI (the ETF).  VTSAX, the mutual fund, requires a minimum $10,000 investment, and the ETF can be purchased commission-free if you are a Vanguard customer.  Get some money working there, and spend some time learning about the various asset classes.  As you add to your holdings, look to diversify and try to buy things when they are on sale.

Vanguard is revered for its low fees.  I own some managed funds run by other companies that have performed well over time, better than the Vanguard equivalents.   But Vanguard is a great place to start.

I use to run a brokerage account through TradeKing and had very cheap fees there. Would Vanguard be cheaper through a personal brokerage account or are its fees cheap becuase you are a member? I may be wrong, but what I see in your response is that I will have to take some risk at the start until I can diversify? Since I am putting all 5-10k in to one ETF (even if it is inherently diversified, that whole ETF can still fluctuate).

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: What to do with 5K, 10K, 20K <
« Reply #10 on: August 14, 2012, 10:09:33 PM »
I don't think you're really getting what diversification means.  Sure the "whole ETF" would fluctuate.  But that's like saying your whole portfolio of investments would fluctuate, no matter how many different things you invested in--of course it would?  A vanguard ETF that is a broadly diversified set of investments will likely have some going up, some down, some more than others, just like as if you invested really small chunks into each of the underlying investments in the fund.

You can buy a bunch (46) of Vanguard ETFs commission free if you open a brokerage account with them--that's all being a "member" means.  The expense ratios can be a bit cheaper that way--the VTI ETF has a 0.06% expense ratio, vs. the investor shares of the equivalent mutual fund being 0.18% (the Admiral shares with a $10K min. investment is also 0.06%).  I believe it would generally be cheaper to go through Vanguard for those Vanguard ETFs (and Fidelity for theirs, and T. Rowe Price for theirs) instead of having a 3rd party brokerage account which will likely have trading commissions.
« Last Edit: August 14, 2012, 10:15:41 PM by ShavinItForLater »

tannybrown

  • Stubble
  • **
  • Posts: 118
  • Age: 39
  • Location: South Scottsdale, AZ
Re: What to do with 5K, 10K, 20K <
« Reply #11 on: August 14, 2012, 10:10:19 PM »
A balanced fund (like VBINX) is a quick and dirty way to get some broad diversification with a small amount of money.

To answer your later questions: the point of an asset allocation is to limit risk.  But that said, a "no risk" option is, by default, a "no reward" option.

So why Vanguard? I know many people keep pushing its funds and services, is there no one better?

I cannot do an asset allocation with 5-10k. The 'Stash would be too thin and the fees would eat up some of it (probably more than I would want to see go). If I just plunge all 5k into one asset class, then there is lots of risk since I do not have anything to balance it with.

The point of the balanced fund is that it is not one asset class.  Even a cursory look at VBINX illustrates it's a blend of stocks and bonds.  If you want to spread amongst more asset classes, you could try purchasing a basket of ETFs.

Why Vanguard?  Because they're pretty good at limiting the fees you're concerned about.  Note the 0.24% expense ratio of VBINX...nothing outrageous. 

The next step is probably deciding what your asset allocation should be, and then figuring out how to get there with the cash you have, rather than the other way around. 
« Last Edit: August 14, 2012, 10:20:19 PM by tannybrown »

OWHL

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: What to do with 5K, 10K, 20K <
« Reply #12 on: August 14, 2012, 10:21:13 PM »
Another choice is the Vanguard STAR fund, described them them this way:

"This balanced fund is invested 60% in stocks and 40% in bonds. It offers investors exposure to eleven underlying actively managed Vanguard funds—including domestic and international stock funds and U.S. bond funds—each with its own distinct investment approach. It may be considered a “one fund option” for investors looking for broad diversification across asset classes who can tolerate moderate market risk that comes from the volatility of the stock and bond markets."

This one is specifically designed to give you a lot of diversification in one fund, with a small minimum investment ($1,000).  The expense ratio is 0.34%, so not a whole heck of a lot of fees to worry about.  Pretty much targeted to the small investor who wants "one fund and done".

Ought the fee percentage be smaller? I am sure MMM mentioned during a post to look for .17% or less?

To expand on Another Reader's response about Vanguard, yes it's the low fees, along with pretty good customer service.  They are essentially a non-profit company, they plow their "profits" into lowering their mutual fund fees and they don't do a ton of marketing and don't charge any sales commissions.  They have some of the lowest expense ratio mutual funds, although Fidelity and T. Rowe Price also have competitive low-expense fund choices. 

Yes some managed funds *can* do better, but the big problem is choosing the "winners"--there has been research showing that 80% of managed funds do worse than the indexes over time, and it's not like the same 20% always beat the indexes, not to mention that funds close, get consolidated, the managers leave, etc.  So the argument goes that lower expense ratios with index/broadly diversified mutual funds will beat actively managed funds, almost all the time over the long term.

If mutual funds are not as efficient as Indexes, then I should just start with Indexes?
What is the difference between index, broadly diverse mutual funds vs. actively managed funds?

This is all assuming that you don't need to spend this money for at least about 5 years.  Anything less than that, go with money markets, CDs, savings accounts, etc.--with the shorter time horizon, the risk of loss (from short term up and down swings) outweighs the risk of losing real value from inflation.  About 5 years out that flips, because the up and down swings start to even out and inflation starts to add up.

Even with MM, CDs, SAs having roughly 1.2% return?

Why Vanguard?  Because they're pretty good at limiting the fees you're concerned about.  Note the 0.24% expense ratio of VBINX.

Is .24% too high for an expense ratio?

The next step is probably deciding what your asset allocation should be, and then figuring out how to get there with the cash you have, rather than the other way around.

Wont everyone's asset allocation be the same at some point, since the main goal is as much diversification as possible? Even if I decide to go 25% into four asset classes or even 50% into two, it is still questionable to stretch out such a small sum of money.

How stable are diverse funds really (ETFs, mutual)? To the point where I can sack 10K into one and not worry for a few yrs about volatility?

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: What to do with 5K, 10K, 20K <
« Reply #13 on: August 14, 2012, 11:05:28 PM »
Ought the fee percentage be smaller? I am sure MMM mentioned during a post to look for .17% or less?

The STAR fund includes multiple asset classes, and has a lower than average minimum investment ($1,000) for a mutual fund.  I don't think .17% is any magic number, it's just something that is quite doable in an index fund.  Paying an extra .17% amounts to an extra $8.50 per year on a $5,000 investment.  You can decide how significant that is.  What I think you'd want to watch out for is the actively managed funds that sometimes can have expense ratios well over 1%, sometimes even 2% per year.  Some even have sales commissions ("loaded funds") where they take a chunk out of your investment up front, or sometimes a back end charge when you sell.  Stay away from those, far away.


If mutual funds are not as efficient as Indexes, then I should just start with Indexes?
What is the difference between index, broadly diverse mutual funds vs. actively managed funds?

The difference between an index fund and the balanced funds we've been spotlighting is that the balanced funds include not only stocks but also bonds--both the STAR fund and the VBINX fund are 60% stocks, 40% bonds.  An index fund would be all one asset class, you can buy a bond index fund and/or a stock index fund or ETF and decide your own allocation of how much in each.  However, in the balanced funds they will stay balanced automatically--if stocks or bonds shoot up or down, the fund manager will shift the investment mix to keep it 60/40.  If you buy your own, that won't happen, you'll have to do it yourself if you want to maintain the same balance.

Actively managed funds are funds where the fund manager is picking investments she thinks will beat the market, and they decide "actively" when to buy and sell each one.  An index fund just tries to mimic the performance of the overall index it is comparing itself to (e.g., S&P500, Wilshire 5000), so nobody actively decides when to buy or sell anything--a computer can essentially do the buys and sells to stay in line with the index.  That also generally means low capital gains distributions and taxes, because again nobody is buying and selling regularly like you sometimes find in an actively managed fund.


This is all assuming that you don't need to spend this money for at least about 5 years.  Anything less than that, go with money markets, CDs, savings accounts, etc.--with the shorter time horizon, the risk of loss (from short term up and down swings) outweighs the risk of losing real value from inflation.  About 5 years out that flips, because the up and down swings start to even out and inflation starts to add up.

Even with MM, CDs, SAs having roughly 1.2% return?

Yes, even with 1.2% return.  I know it's hard to think you're "giving up" so much potential return.  But you're also giving up the risk that you could be down 25% or 50% when you need the money in just a couple of years.  Historical patterns show that over longer periods, you can pretty much count on solid returns from stocks and bonds, with little risk you'll lose a lot of your investment.  But over short time periods less than 5 years, historical patterns show that just about anything could happen.  At the same time, inflation in recent years is only about 2 or 3%, but over 5 years a 3% inflation rate means prices have risen almost 16%, over 10 years about 34%--and that's assuming inflation stays low, and it has gone much, much higher some years.  So over those long time periods, getting the returns above inflation is the bigger concern.

It's your money, you can do what you want over a short time, but understand if you are only investing for 2 years for something like a down payment, and when it comes time to buy the house and the market is suddenly down 20-30%, you'd be a pretty unhappy camper.  Sure it could be up 20-30% too, but over a really short time it becomes less like investing and more like gambling.

Wont everyone's asset allocation be the same at some point, since the main goal is as much diversification as possible? Even if I decide to go 25% into four asset classes or even 50% into two, it is still questionable to stretch out such a small sum of money.

How stable are diverse funds really (ETFs, mutual)? To the point where I can sack 10K into one and not worry for a few yrs about volatility?

No, everyone's asset allocation will not be the same.  People have different goals, different time horizons, and different risk tolerances, to name a few.  On that last point, some people might freak out if their investment value dropped 10% in a week.  Others might be overjoyed at the buying opportunity and dump more in to take advantage.  That first group might keep their money out on the sidelines "until the market recovers".  Then they'll buy at the top and watch it drop again--they sometimes call that getting whipsawed.  People in that freak out group are better off with more conservative investments, even if the returns are smaller, because they will actually be able to stick with the plan. 

There is no one size fits all asset allocation.

The magic of mutual funds and diversified commission free ETFs is that you don't need a ton of money to be diversified.  There is nothing questionable about diversifying a small investment--the opposite, putting it all in one stock or something like that, is much more questionable because you are taking more risk for often no better expected return.

Your last question about how stable they are gets back to that risk tolerance question.  In any given year you can easily see your investment drop 10%, or gain 10%.  Sometimes more, sometimes much more, in either direction.  Look at any stock chart for the last 50 or 100 years for one of the major indexes to see what could happen.  The longer the time period, the less likely it will be that you'd lose money, and the more likely you'd approach the average long term return for that asset class or set of asset classes.  There are no guarantees though, and if you're only investing "for a few yrs", yes you would need to worry about volatility.

Kriegsspiel

  • Guest
Re: What to do with 5K, 10K, 20K <
« Reply #14 on: August 15, 2012, 06:29:06 AM »
Since you'd be out of debt, and earning a paycheck, you'll be investing a significant amount of money every month.  So I'd suggest you just start with one asset class worth of a mutual fund at Vanguard each $3,000 you get (their mutual funds don't start at $10,000, they start at $3,000).  If I were you, I'd do my initial $5,000 into the VTSMX (Total Stock Market).  Then, whenever you have $3,000 saved up, open a Roth and buy $3,000 worth of VBMFX (Not sure if that's the right symbol, but it's the Total Bond Market).  The next $3,000 you have saved, buy the Total International Market.  Then from there, just allocate each $3,000 to whichever funds are out of balance according to your asset allocation (you might try 20% TBM, 15% TISM, 65% TSM).

fiveoh

  • Bristles
  • ***
  • Posts: 375
Re: What to do with 5K, 10K, 20K <
« Reply #15 on: August 15, 2012, 07:25:13 AM »
Why do people keep thinking dividend stocks are in a "bubble?"  Yes they are popular because they offer higher yields than some treasuries atm but their valuations are nowhere near "bubble" status or even that much higher than they have been historically.   
« Last Edit: August 15, 2012, 07:27:16 AM by fiveoh »

JohnGalt

  • Bristles
  • ***
  • Posts: 481
  • Age: 34
  • Location: TX
Re: What to do with 5K, 10K, 20K <
« Reply #16 on: August 15, 2012, 08:49:44 AM »
I have been pondering what I would do after I begin to balance out my debt-to-income ratio (to the point where there is no more debt) and begin to save up a good 'Stash. In many of MMM's posts and guest posts they offer advice for 100,000 or more specifically.

So what is done with the 5k? or 10k? Or to each increment up to 100k?
Options?: Stocks, Bonds, CDs, Money Markets, savings accounts, options, real estate, cash

Do I choose dividends? Is that with or without DRIP? Can you get much gain from Index or mutual funds with only 5-10k? You also have to look at the fees and taxes associated either before or after.

What is frustrating is there is no clear way to have a small amount of money work for you because there is always the chance of a better opportunity that I or anyone could be missing out. Sure you may have the no risk return of dividends from the Aristocrats (until the bubble bursts), but it is probable to gain on a heavy risk option call or put since I am young and can balance out the loss later (only being 23). CDs are about 1.3% for 2-5yrs, money markets are 1%ish, savings account is 1%, real estate is not a choice (maybe for 50k+?).

So as Aragorn son of Arathorn once said to the living dead, "What say you?"

First thing to realize... where you put your first $5,000 or $10,000 doesn't matter so much.  Whether you stick it in a CD and earn 1%, the stock market and lose or gain 10%, bonds and lose or gain 5%, etc.  We're talking about a very small swing in the grand scheme of things in terms of absolute dollars.  What's important is that you continue saving.

I would suggest that you not worry about where to put that money for now - park it in a savings account if you're worried about making the wrong decision.  Go research basic investing principals - then you can put it somewhere when you know what you're investing goals and comfort zones are.


jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1072
  • Age: 41
  • Location: Connecticut
Re: What to do with 5K, 10K, 20K <
« Reply #17 on: August 15, 2012, 08:59:11 AM »
I also struggled with this problem, and this is what I decided to do:

I keep about 10k in an online savings account (ING) for easy access.
I hold a mix of assets in my 401k and IRA.
I started with $3k (to meet required minimum) and invested in VFINX (a Vanguard S&P 500 index fund) last summer when stocks had that big dip.  I continued to invest automatically a set amount with each paycheck, and reinvested any dividends (around 2.5%, I think).  I have since accumulated enough in that fund to transfer to the admiral version of the fund, which has lower fees.
In addition to VFIAX, I invested my bonus into VWLTX (a muni bond - tax exempt - fund, since I am in a higher tax bracket).  I also reinvest the income from this each month and invest automatically with each paycheck.
Both funds are growing nicely.  I chose to invest this way after watching my husband's mostly failed experiments with investing in individual stocks.

jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1072
  • Age: 41
  • Location: Connecticut
Re: What to do with 5K, 10K, 20K <
« Reply #18 on: August 15, 2012, 09:00:56 AM »
To clarify, the vanguard funds I mentioned above are held in my taxable account.  I invest in taxable only after maxing out my 401k.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27911
  • Age: -999
  • Location: Traveling the World
Re: What to do with 5K, 10K, 20K <
« Reply #19 on: August 15, 2012, 09:14:52 AM »
Why do people keep thinking dividend stocks are in a "bubble?"  Yes they are popular because they offer higher yields than some treasuries atm but their valuations are nowhere near "bubble" status or even that much higher than they have been historically.

In a bubble does not mean at the peak of a bubble, which is how you seem to interpret it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

fiveoh

  • Bristles
  • ***
  • Posts: 375
Re: What to do with 5K, 10K, 20K <
« Reply #20 on: August 15, 2012, 09:53:51 AM »
Why do people keep thinking dividend stocks are in a "bubble?"  Yes they are popular because they offer higher yields than some treasuries atm but their valuations are nowhere near "bubble" status or even that much higher than they have been historically.

In a bubble does not mean at the peak of a bubble, which is how you seem to interpret it.

I interpret it to mean dividend stocks have a higher valuation than non dividend stocks.  I haven't seen any evidence of this.  Sure some of the dividend stocks are overvalued.  The same goes for non dividend stocks.  I have yet to see any proof that just because a stock is a strong dividend stock it is overvalued and therefore in a "bubble" but people keep repeating this dividend bubble thing.   

Anyway this is getting off topic...

TLV

  • Bristles
  • ***
  • Posts: 492
  • Age: 32
  • Location: Bellevue, WA
Re: What to do with 5K, 10K, 20K <
« Reply #21 on: August 15, 2012, 11:20:51 AM »
Another choice is the Vanguard STAR fund, described them them this way:

"This balanced fund is invested 60% in stocks and 40% in bonds. It offers investors exposure to eleven underlying actively managed Vanguard funds—including domestic and international stock funds and U.S. bond funds—each with its own distinct investment approach. It may be considered a “one fund option” for investors looking for broad diversification across asset classes who can tolerate moderate market risk that comes from the volatility of the stock and bond markets."

This one is specifically designed to give you a lot of diversification in one fund, with a small minimum investment ($1,000).  The expense ratio is 0.34%, so not a whole heck of a lot of fees to worry about.  Pretty much targeted to the small investor who wants "one fund and done".

Ought the fee percentage be smaller? I am sure MMM mentioned during a post to look for .17% or less?

Quote
It offers investors exposure to eleven underlying actively managed Vanguard funds

The STAR fund has higher expenses than VBIAX (.10%) because it's made up of actively managed funds instead of  index funds.

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: What to do with 5K, 10K, 20K <
« Reply #22 on: August 15, 2012, 12:55:11 PM »
For the record, I'm not really pushing the STAR fund and I've never invested in it personally, the only reason I brought it up was because it has a ton of diversification and a low minimum, which seemed on topic here for a brand new investor with not a lot to invest.  My wife and I have most of our retirement investments spread across Vanguard Total Stock Market (the largest), International Growth, and REIT funds.  College savings for the kids are also in an S&P500 index, but through a non-Vanguard 529 plan.

We're in a very different place than the OP though I think, we've been investing for 20 years, read countless books and articles about investing, and have a pretty sizable portfolio at this point.  If I were just starting out with a few thousand and didn't know much about investing the STAR fund I think would be a more attractive option.  But again, that's not to say it's better than VBIAX, as long as you can meet the minimum investment for that fund--in fact in that case I'd probably prefer it if I were looking for a single balanced fund.

I'd also echo the sentiment that savings is more important than investing, although anyone who has looked at those magic of compound interest graphs about how things grow over a long period of time can see that starting early with investing can make a huge difference 20 or 30 years later.  Conceptually, you could tie that initial small investment to the huge returns it provides many years down the line--not really sure you can call it small dollars.  Certainly valid though to say that increasing savings early on could have an even larger impact.