Need help choosing Index fund to start investing

[The knitter]

My husband and I want to get the ball rolling with some investments. We don't know much about investing, but want to start soon to take advantage of time. He has researched several Index funds on Vanguard and Schwab.

The two we are leaning toward are:
SWPPX (Shwab S&P 500 Index Fund)http://www.schwab.com/public/schwab/investing/investment_help/investment_research/mutual_fund_research/mutual_funds.html?path=%2FProspect%2FResearch%2Fmutualfunds%2Fsummary.asp%3Fsymbol%3DSWPPX
VTTHX (Vanguard Target Retirement 2035 Fund) https://personal.vanguard.com/us/funds/snapshot?FundId=0305&FundIntExt=INT#tab=0

Questions:

• My initial concern with the Vanguard fund is whether we'll be able to withdraw money before retirement age. That's our goal, and it doesn't say anywhere there are restrictions, but I'm worried that's assumed with a fund named "Retirement 2035 Fund."
• I'm also wondering if people have had a better experience with one company over the other.
• Finally, the fees seem about the same on both of these accounts, but does anyone with experience know about hidden fees we should account for?
• We are also wondering if it makes sense to hold our emergency fund in this Index fund, instead of the low interest savings account. We've got about $6,000 in savings as our emergency. Considering moving some over to a higher yield fund.

We're starting with $1,000 and plan to add at least $100 a month. Any advice is appreciated, as we're new to this. Thanks!

[Parzival]

First off, congratulations on getting the ball rolling! Judging by your prospective options, you're already off to a good start.

Re: the Vanguard Target Retirement fund: you would only have to worry about your access to it before retiring, if you were investing in it through an officially sanctioned retirement program (401k, 403b, IRA, etc.).  If you were investing in it outside of one of these programs, than you have full access to your money at any time, despite its name.  (and even if it was in a 401k/403b/IRA/etc, you could still withdraw your money, but there would be some restrictions).

Re: Vanguard vs. Schwab:  When I started investing about 12 years ago, I started with the Schwab S&P 500 Index. I wish I could remember the specifics now, but it turned out there were some hidden expenses that weren't explained up front. I think it had to do with their documentation of expenses online. Anyway, when I called them to complain, I was basically told that's the way it is, like it or lump it.  Instead, I took my money to Vanguard, and have been happy there since.  For all I know, Schwab has improved its disclosures since then, but I've never felt the need to go back and see.

Re: putting your emergency fund into an index fund:  personally I think that's a bit risky, as it may not all be there when you need it. Think back to 2008, when the market dropped (plus or minus) 50%. If you had needed your $6,000 at that time, you might have found you only had $3,000 to draw on.  Despite the lousy interest rates on savings accounts, the big benefit is knowing that you will have the total amount available if you need it,  whenever you should need it. One option to consider if you really don't think you'll need that emergency fund in the near future, is to consider taking part of that amount and using it to  ladder CDs: http://www.forbes.com/sites/ilanagreene/2011/06/22/cds-laddering-making-sense-of-low-return-on-investment/
Even though CD rates aren't that great either right now, they're likely better than your savings account interest rate. If they're FDIC-insured (which is true of most bank-offered CDs), then your principal amount is safe even if the bank folds. If you do need to take money out before the CD's maturity date, you'll have to pay a penalty - usually 3-9 months of interest (which would still be a pretty small amount given the low interest rates today).  But given the potential to earn a little bit more than a straight savings account, while knowing your principal is actually there if you need it, it may be something you and your husband may be interested in.

Best of luck!

[GreenGuava]

First of all, the two funds you're looking at are not comparable:  one is an S&P 500 index and is strictly stock in large domestic companies, while the other is a fund-of-funds that contains domestic stock large and small, foreign stock, domestic bonds, and foreign bonds.

The two have very different uses.  One is used as part of one's domestic stock allocation in a balanced portfolio, while the other is used as its own balanced portfolio.

My initial concern with the Vanguard fund is whether we'll be able to withdraw money before retirement age. That's our goal, and it doesn't say anywhere there are restrictions, but I'm worried that's assumed with a fund named "Retirement 2035 Fund."

If you're investing in taxable, you can withdraw at any point.  The Vanguard target retirement fund is meant as an "all in one" for within a tax-advantaged account to be investments appropriate for someone planning to retire in 2035.

By the way, if you're buying in a taxable (non-IRA, etc) account, the TR fund is very tax inefficient.  It'd be better to buy the underlying funds directly possibly substituting municipal bonds for the total bond market, depending on your tax bracket.

I'm also wondering if people have had a better experience with one company over the other.

I have no experience with Schwab, but have great things to say about Vanguard (100% of my investments are with them, for what that's worth).

Finally, the fees seem about the same on both of these accounts, but does anyone with experience know about hidden fees we should account for?

Vanguard has a $20/year account maintenance fee; this is waived if you sign up for e-delivery (that is, you don't ask for physical mailings of everything).

We are also wondering if it makes sense to hold our emergency fund in this Index fund, instead of the low interest savings account. We've got about $6,000 in savings as our emergency. Considering moving some over to a higher yield fund.

If you're just getting started in investing, your passive income is presumably quite low.  As such, holding an emergency fund in a highly volatile asset (stocks are the entirety of the Schwab fund and a majority of the Vanguard target fund) is a terrible idea.   When you get to the point that your passive income is higher and reliable, then you can afford to put your emergency fund into a higher-yielding asset class than cash.  In the meantime, you need to have it available for, well, an emergency.

We're starting with $1,000 and plan to add at least $100 a month. Any advice is appreciated, as we're new to this. Thanks!

Is this in addition to tax-advantage retirement investments?  That's an important detail before I can help with that.

[kyleaaa]

A point: nothing is EVER assumed with mutual funds. If there are penalties, they will be in the prospectus.

Between the two funds you mentioned, the Vanguard option is clearly superior by a huge margin. And no, absolutely do not invest your emergency fund in any sort of stock fund. That defeats the purpose of having an emergency fund. I would highly suggest reading a few good personal finance books before making any decisions. Personal Finance For Dummies is actually pretty decent.

[The knitter]

Thanks everyone. This is very helpful, as we're so new to investing.

@GreenGuava: We've each maxed out what our companies allow us to put into our 401Ks, and I'm also putting $75 a month into a ROTH IRA. (I plan to bump that up in a couple months when I'm finished paying off my student loan). On the two different funds: It sounds like the Vanguard Target date retirement fund is it's own balanced portfolio, correct? I think that's what we should start with.

Does anyone recommend a different Vanguard index fund for beginners?

@Kyleaaa - I've been reading a lot of personal finance books, but nothing on investing. Does Personal Finance for Dummies have a lot on how to start investing? Or any other recommendations? I'm torn between doing too much research and wasting time, or just starting an index fund to get the ball rolling.

[GreenGuava]

@GreenGuava: We've each maxed out what our companies allow us to put into our 401Ks, and I'm also putting $75 a month into a ROTH IRA. (I plan to bump that up in a couple months when I'm finished paying off my student loan). On the two different funds: It sounds like the Vanguard Target date retirement fund is it's own balanced portfolio, correct? I think that's what we should start with.

What's the interest rate on that student loan?  You might want to use the $1000 you were thinking of investing and use that to pay down the student loan instead.  Alternately, add it as part of the 2013 Roth (not an acronym) contribution, and wait until that's maxed out for the year before moving to taxable (unless you already have a significant amount in these accounts, but it doesn't sound like you do).

For that matter, where is your Roth IRA, and what's it invested in?

Is the money you want to invest towards retirement?  If so, and you're looking at taxable, it might be better to use it to expand your retirement portfolio into taxable;  the typical first suggestion is to hold your international stocks outside of tax-advantaged accounts.  However, the fund I'd suggest for that has a $3000 minimum. 

[suntailedshadow]

@Kyleaaa - I've been reading a lot of personal finance books, but nothing on investing. Does Personal Finance for Dummies have a lot on how to start investing? Or any other recommendations? I'm torn between doing too much research and wasting time, or just starting an index fund to get the ball rolling.

I recently finished "The Bogleheads Guide to Investing" and it is an excellent introduction to investing principles and I found it to be a smooth read. It can be picked up a number of places (Including Amazon) and is fairly inexpensive.

http://www.bogleheads.org/wiki/Bogleheads'_Guide_To_Investing

If you look around there a number of good forums on excellent beginner investing books. You don't have to read a dozen before you jump in but I would recommend reading at least one so that you can feel confident in your choice. (However if you feel like it would take you 6 months to get through the book perhaps you should just take the advice for the vanguard account now and go back and mix things up later if you change your mind after what you learn :-) )

[Zaga]

On the two different funds: It sounds like the Vanguard Target date retirement fund is it's own balanced portfolio, correct? I think that's what we should start with.

I think your logic here is faulty.  Your portfolio as a whole should be balanced, not each individual account.  One option that many recommend is to invest in an S&P 500 Index or an International Index (to get the foreign tax credit) in your taxable account, then round off what else you need in your 401-K's and Roth's.

We don't have any taxable investments, but between us we do have 4 separate investment accounts.  2 of them have just one fund each, the other 2 have 3 funds each.  In total though we only own 4 different funds, they are just split up the way they are to make re-balancing easier.

And now that we mention re-balancing, you need an IPS.  That's an Investment Policy Statement.  Once you read up on investing, you'll be able to put this together.  And once you have your personal IPS, then you won't have any questions about what to do with your investments, you will have already decided and will just be following your plan!

I'll give you an example.  Our IPS has us investing 25% of our portfolio in bonds, 15% in international stocks, 49.5% in large domestic stocks (S&P 500 Index), and 10.5% in small domestic funds.  Next year we will increase the bonds to 30% and decrease everything else proportionately.  Also, the rest of our plan has us investing as much as possible in 401-K type plans to help with taxes now, and the remainder in Roths to help with taxes later.  We're not yet at the point of taxable investing because we can't max out all of the tax advantaged stuff yet.

See?  Since I have a simple plan I don't have to wonder what to do with extra money.

[Iron Mike Sharpe]

@Kyleaaa - I've been reading a lot of personal finance books, but nothing on investing. Does Personal Finance for Dummies have a lot on how to start investing? Or any other recommendations? I'm torn between doing too much research and wasting time, or just starting an index fund to get the ball rolling.

I recently finished "The Bogleheads Guide to Investing" and it is an excellent introduction to investing principles and I found it to be a smooth read. It can be picked up a number of places (Including Amazon) and is fairly inexpensive.

http://www.bogleheads.org/wiki/Bogleheads'_Guide_To_Investing

If you look around there a number of good forums on excellent beginner investing books. You don't have to read a dozen before you jump in but I would recommend reading at least one so that you can feel confident in your choice. (However if you feel like it would take you 6 months to get through the book perhaps you should just take the advice for the vanguard account now and go back and mix things up later if you change your mind after what you learn :-) )

I second this post.  Go to your local library and check this book out.  If they don't have it, request an interlibrary loan or buy it if you have to.  Do not make any decisions until you at least read this book and understand it (it's a very easy read). 

Come back with specific questions after reading it.

[neoptolemus412]

I am familiar with both Schwab & Vanguard.  Here's some basic advice before getting into investing. 

Schwab's S&P 500 is fine as it's a low cost index fund with $100 minimum.  It's 10 bps for the expenses.  The only fees you have to watch for are early withdrawals of 30 days, which assess a 2% penalty against you.  This stops traders from jumping in & out of the fund.  It also is how they keep expenses so low.  read the prospectus as it's only 2 pages.  Yes, read it.  It will take 10 minutes tops & you'll learn in plain english what the fund is doing, who manages it, and how fees are calculated.  For other Schwab offerings, they have many no-load funds, but also many more diverse investment products.  Vanguard is a mutual fund company that pushes clients on the retail side (individuals) to invest in scale.  Schwab is a brokerage house that caters to investors interested in trading stocks, bonds, options, and many more diverse products.  Their checking account is a good deal as well.  Not much in interest, but they reimburse you ATM fees and also are all online, so you can do everything from your phone/computer. 

Vanguard's TRTs (target retirement funds) are ok.  TRTs are popular b/c in 06 Congress essentially made them the default in 401K plans.  However, they are not regulated as far as risk tolerance, thus every company makes their own assessment of what a 2050 fund might hold.  I'm not a fan of TRTs b/c it's not as easy as they make it look.  As an investor, you need to set your own risk tolerance, asset allocation, and do some research.  TRTs do this generically across large index funds that may not fit your personal needs.  Vanguard is aggressive in some of their TRTs (stock heavy) and may not be the appropriate asset allocation for you.  Also, all TRTs invest in the Total Stock, Total Bond, Total Intl., & VG MM acct.  These funds are macro funds across all types of of different asset classes.  You might want to get into mid-cap, small-cap, TIPS, ect. depending upon your investing goals.  It might behoove you to take some time to research asset allocations, your goals, your retirement horizon, and then think about investing strategy.   

[The knitter]

Thanks for the feedback. It seems like we have some reading to do before making any big decisions. My library didn't have the bogleheads book, but I did just pick up "the only investment guide you'll ever need" by Andrew Tobias and "the smartest retirement book you'll ever read" by Daniel Solin.

It was slim pickings at the library, so some inter-library loans may be in order in the next couple of weeks.

Anyone read either of these books? I picked them because they seemed to be the only ones geared toward beginning investors without seeming overly cheesy.

[Zaga]

I don't remember exactly what I read, there was a period that I just took out a different investment book each week from the library.  Soon enough I picked up enough to see which ones were full of shit (invest everything in real estate!) and which ones were being sensible.  The Boglehead's Guide to Investing was by far my favorite, but I'd say read what you have easily available first and keep your bullshit meter operating.  It's pretty easy to pick up on which books are worthless.