For the longest time I was intimidated by investing and by the thought that it was complicated, something best left to professionals, and something you needed to go to school to understand.
I didn’t really plunge very far into the investing waters until much later on when I started reading a bit more about it and realized that while it can be complicated, there are also great ways to invest and get good returns that are much simpler and easier to understand.
Within the past couple of years I’ve come to realize that just about anybody can invest for their future while enjoying low costs. There are a variety of platforms that will allow you to do that, but of those I’ve got a couple of favorites that are not only simple and easy to understand, but also low cost – which means your returns will be even better.
Investing In Low Cost Index Funds
To me the way to invest that makes the most sense is to diversify your holdings as much as possible, keep it low cost and to invest for the long term. When you try to pick individual winners and losers in the stock market, and jump in and out of the market, far too often you’ll end up losing your shirt in the process.
For the average person investing in index funds is probably the best way to get started. Reasons why?
- Low cost: For an actively managed stock fund the average expense ratio is 1.32% per year. For a good index fund like the Vanguard Total Stock Market Index, you’ll pay much less, around .17%. The ETF version is even lower!
- Highly diversified: When you buy an index you’re buying everything within that particular index, and tracking the index over time. So by definition you’re very diversified.
- Better returns: For the past 10 years, index funds have beaten the average gain for comparable actively managed funds. When you factor in the lower fees and better tax efficiency of index funds, they’re almost always a better deal.
Two Low Cost Ways To Start Investing
There are a myriad of ways to get started investing, but they will vary as to how easy they are for a beginning investor, or they vary in how much they cost in management fees and other costs.
Today I wanted to look at two of the easiest and low cost ways to invest – and how my family is investing.
Probably one of the easiest ways to invest these days is to open an account with Betterment.com. Betterment is a low cost way to invest in a completely diversified portfolio. While it isn’t the lowest cost way to invest (there are cheaper ways, like through Vanguard – see below), it is definitely one of the very simplest.
When you open an account with Betterment you really only have a few main choices to make.
- How much do you want to invest.
- How much of your investment you want in equities (Stock Market).
- How much you want in Treasury bonds (TIPs).
After you do those things, Betterment will invest your money in a fully diversified set of ETF stock and bond index funds, and your allocations will be regularly re-balanced. It’s extremely simple and the returns over the long haul will be as good or better than most actively managed accounts.
If you want to be slightly more involved than over at Betterment, one of my favorite places to invest is over at The Vanguard Group. Vanguard is known for their low costs mutual funds, and have a variety of index funds to fit just about any need.
With Vanguard you can easily setup a fully diversified portfolio that invests in domestic and international stocks and bonds by creating a simple three fund portfolio. Basically you choose three index funds to cover the domestic, international and bond markets, and you’re all set. Here’s an example allocation:
- Vanguard Total Stock Market Index Fund (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total Bond Market Fund (VBMFX)
First you would choose how much you want in stocks versus bonds. Some people suggest that you do your percentage of bonds (low risk) as your age. So if you were 30 years old, do 30% bonds. Others say to choose your percentage of bonds by setting your percentage of stocks at no more than twice your tolerable loss. So if your maximum tolerable loss is 25%, you shouldn’t put more than 50% in stocks.
After choosing the percentage of stocks versus bonds, you’ll want to choose your percentage of domestic versus international stocks. Vanguard suggests a 20-40% allocation for international, and the rest for domestic stocks.
So for our example funds listed above, the allocation would look something like this for someone 30 years old:
- Vanguard Total Stock Market Index Fund 50%
- Vanguard Total International Stock Index Fund : 20%
- Vanguard Total Bond Market Fund: 30%
It may seem complicated at first, but after you read about it, it’s actually pretty simple. Read more about a three fund portfolio here.
Vanguard and Betterment are my two favorite low cost and easy ways to invest, and options I would recommend to anyone just getting into the investing game.
What would you recommend people do to get started investing?
Last Edited: 8th August 2013