P.S. On feeling overwhelmed by starting out in investing: Fidelity has Target Year Index Funds. It's an index fund whose asset allocation changes automatically as you get closer to your retirement year (i.e. it owns a stocks index fund and a bonds index fund and balances its investment in each). They're very slightly more expensive than bare bones index funds where you have to do the asset allocation yourself, but much cheaper than the general Target Year funds which are managed. (Make sure it has "index" in the fund name! They will try to sell you on the managed funds instead.)
I'm pretty sure Vanguard offers something similar, and either company will charge you extra for buying the other company's fund through them, so stay in-house - if you already have a Vanguard account, use Vanguard. But having the automatic asset allocation also helped soothe my nerves - one less thing for me to somehow mess up.
(I do use a target year as though I will retire at 65; this ensures it will be set up for more aggressive growth for longer, and I can move it into a different target year fund whenever I actually want it to start being more conservative.)
HI Tass! Thanks for the notes. I will be honest... there are even some terms in your post I don't quite understand. I appreciate the help and have highlighted the terms I do not understand to see if you have time to clarify-- if you don't, I totally understand- it's not your job to educate me! I've just read what feels like EVERYTHING regarding investing and I really don't understand it any better.... even the most basic is over my head. It's embarrassing compared to the level of knowledge everyone here has.
Here is the stock series overview which will teach you the basics. It's pretty long but if you start at the beginning you can get a good overview even if you don't finish. And it's basically where I learned all of this.
http://jlcollinsnh.com/stock-series/Here's the basics. (And please correct me if I'm wrong, because I am no expert.)
Stocks are when you loan money to a company buy buying a piece of it; the company repays you by paying you a portion of their profit called a dividend, and you can make money if you sell the stock later at a higher price. Stocks grow quickly but also might drop quickly in the short term; they're not very stable.
Bonds are when you loan money to a government or company and they pay you back with interest, but there's no ownership or dividend involved. Bonds don't grow very fast but they are considered very stable.
A
mutual fund or just a "fund" is a collection of stocks and bonds that you can invest in as a group - you invest in the fund, and the fund invests in other stuff. It's kind of like a shell for your investments where somebody else has to figure out the details for you.
Index funds are when you buy a little piece of everything on a particular market. There are stock index funds and bond index funds. They are a good investment especially over long periods of time, but you need to decide how much of each (stocks vs bonds) you want. That's called
asset allocation. 100% stocks is extremely aggressive - very risky but lots of growth potential - 100% bonds has minimal growth potential but also minimal loss potential (unless the government collapses, but in that case your savings are probably screwed either way). For people just starting out with a lot of time to grow, an 80% stocks/20% bonds allocation is commonly recommended.
Managed funds are those where there's a person in charge of deciding what stocks and bonds the fund invests in. This costs extra - not a cost you will see, but an
expense ratio, which is a cost that is taken out of the gains that the fund makes. You can see the expense ratio on pages that describe the features of various funds. Companies that run managed funds will swear they do better than index funds (aka the market), and a small minority do, but we here at MMM don't believe in stock picking. In a cheaper index fund, you get to keep more of your money. (The managed fund I started out in had an expense ratio of 0.75%; the index fund I'm in now has one of 0.15%. Plain index funds are even cheaper. These numbers sound small but they make a big difference.)
Fidelity and Vanguard both run a variety of mutual funds. They will charge you fees to buy a fund from the other company, and they're all very similar anyway, so it's not worth it; just buy funds run by the company your account is with. That's
in-house trading.
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target date fund like the one I mentioned owns several other index funds, and will change its asset allocation between them over time. In general, this means that as you get closer to retiring, you'll to have fewer stocks and more bonds, so your savings become more stable. When you're just starting out, you can handle more risk, because you'll have more time to recover from it.
If you want to retire quickly, you also need to be willing to pursue higher growth. If I plan to retire in 10 years, and I invest in a target date fund for 10 years from now, the growth will be very slow - because it's designed for 55-year-olds who don't want to see their lifelong investment disappear. But I'll never make it to my ambitious goal in only 10 years with that strategy. Instead, I'm in a fund with a target date of 2055 - this one is actually for people my age, designed to grow quickly. It's riskier, but if it crashes, I can recover - I just might have to work 12 years instead of 10. (Pulling these timelines out of nowhere, ftr.) Once I DO retire and it's important to maintain the money I have, since I won't be accumulating more, I can switch that money into a fund meant for retirees.
It's important to remember that the fluctuations in the market between when you buy and when you sell don't matter. Only the prices when you make those transactions matter. I have $3k in an index fund right now, and I won't be retiring for a long time, so I won't be touching that money for years and years. If the stock market crashes tomorrow and suddenly my $3k investment is only worth $500, it doesn't matter to me, because it has plenty of time to recover; if anything, I should be making sure I invest extra while the prices are so cheap. If you read the stock series I linked to, he'll describe how the worst thing you can possibly do is to sell your stock during a crash - but people panic and do it all the time.
How was that explanation?
