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.