Author Topic: What the heck am I missing when choosing an index fund?  (Read 1535 times)

tomcatflyer

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What the heck am I missing when choosing an index fund?
« on: October 18, 2018, 07:30:24 PM »
I'm pretty early in my career and have decided to get serious about my personal finances.

I opened up a retirement savings account with my bank.

I was looking at the list of index funds available and noticed that the fund meant to align with the Nasdaq has dramatically out performed all the other funds being offered - by about 5%.

I get previous success doesn't guarantee future success. And I realize people with shorter horizons will want lower risk investments. But to me this seems like a no brainer. I'm worried about what I don't know. Am I missing something here!?

« Last Edit: October 18, 2018, 07:35:33 PM by tomcatflyer »

ILikeDividends

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Re: What the heck am I missing when choosing a mutual fund??
« Reply #1 on: October 18, 2018, 07:39:35 PM »
I'm worried about what I don't know. Am I missing something here!?
Mutual funds typically have significantly higher expense ratios (read: reduced earnings potential over time), and much less diversification than many index funds.

A bank is the last place on earth I'd open up an account for retirement.  You're not using a Wells Fargo service, by any chance, are you?

If I were a young investor starting out today (unfortunately I'm not), I'd open an account with Vanguard, and just buy VTSAX (you own the whole market, including everything in Nasdaq) with a 0.02% expense ratio, and no fees to trade into it or out of it.

Set it to automatically reinvest dividends, and keep plowing money into it every paycheck without even looking at the stock market for the next 20 or 30 years.

I'm saying this as a very satisfied Schwab client.  Vanguard didn't exist when I started investing. I lack sufficient motive to move accounts now.  If I was just starting out, I'd go with Vanguard.
« Last Edit: October 18, 2018, 07:49:03 PM by ILikeDividends »

Andy R

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Re: What the heck am I missing when choosing an index fund?
« Reply #2 on: October 18, 2018, 08:15:35 PM »
I'm pretty early in my career and have decided to get serious about my personal finances.

I opened up a retirement savings account with my bank.

I was looking at the list of index funds available and noticed that the fund meant to align with the Nasdaq has dramatically out performed all the other funds being offered - by about 5%.

I get previous success doesn't guarantee future success. And I realize people with shorter horizons will want lower risk investments. But to me this seems like a no brainer. I'm worried about what I don't know. Am I missing something here!?

Please don't take this the wrong way, but you definitely don't 'get it', going by everything you said right after it.
It takes time to find an explanation of those words in a way that you can understand, but if you spend enough time reading, you will find it and it will make sense.

MDM

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Telecaster

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Re: What the heck am I missing when choosing an index fund?
« Reply #4 on: October 18, 2018, 09:06:42 PM »
The NASDAQ has been on fire since 2009.  But it actually lags the S&P 500 since 2000.   Will it stay on fire?  I have no idea, and neither does anybody else.   Take ILikeDividends' advice and just buy VTSAX.   If you like, you can read up on investing for a couple years and then make some decisions about asset allocation and such.  Or just leave it in VTSAX.  Either way you'll be fine.   

Radagast

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ILikeDividends

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Re: What the heck am I missing when choosing an index fund?
« Reply #6 on: October 18, 2018, 11:57:08 PM »
The NASDAQ has been on fire since 2009.  But it actually lags the S&P 500 since 2000.   Will it stay on fire?  I have no idea, and neither does anybody else.   Take ILikeDividends' advice and just buy VTSAX.   If you like, you can read up on investing for a couple years and then make some decisions about asset allocation and such.  Or just leave it in VTSAX.  Either way you'll be fine.
No disagreements.  Only to add, whichever index you should choose depends on who your broker is.  If your broker is Vanguard, VTSAX is fee-free to buy, and carries an industry-leading low 0.02% expense ratio.

Schwab has an equivalent ETF that trades fee-free too, but it has a 0.04% expense ratio.  Still pretty decent, but it's twice the expense ratio of VTSAX.

If you want to buy VTSAX through Schwab, you'll pay a $76.00 fee per purchase.  Not exactly ideal for per-paycheck accumulation.  You don't pay that fee if your account is with Vanguard.  The ideal all-equity-market-fund really does depend on which broker you choose.

Vanguard should be a no-brainer choice for new investors.
« Last Edit: October 19, 2018, 01:42:53 AM by ILikeDividends »