It’s all in the comments
Posted on April 3, 2006 8 Comments
As I’ve said before, if you’re not reading the great comments posted to this blog, you’re missing out. In response to the previous two posts, I’ve had some insightful and helpful readers offer advice. (If you’re new to the site, don’t be discouraged! I’m not usually this technical. Read two posts back and follow the discussion…)
Here are the reader responses to my questions about I-Bonds and mutual funds. In general, everyone seems to think bonds are the wrong way to go. But, hey, learning is what this site’s all about!
Anonymous said…
you may want to check into the I-bonds just a little more. While it’s true that if you were to buy them today, you’d get more than 6% – that rate is only for 6 months. The composite rate is based on 2 different combined rates, a fixed component and a variable component. Right now, the fixed component is somewhere around 1%, and the inflation component is around 5.5% (I think).
After six months, the inflation component will adjust based on the comsumer price index (CPI) numbers. (there’s a specific CPI number, but I can’t remember which one). Anyhow, inflation the past six months has been VERY low. If the trend holds, when the new inflation numbers come out around mid-April – the inflation component of the I-bond may be close to 0%. If that’s the case, then the bonds you purchase now will earn about 6.75% for 6 months, then about 1% for the next six months. Plus, you can’t cash them in for 12 months, and if you cash them in before 5 years, you lose the last 3 months of interest. Just something to think about…..I-bonds aren’t looking to be the best place to invest in the near term.
RS said…
Nicole,
Forget bonds…you are too young to have that as your primary investment outside of your retirement fund. You should look at opening a Vanguard account and investing in some of their low-cost index funds. A good one to start with would be their Total Stock Market Fund and then when you save some more, branch out into the Total International Stock Market fund. This strategy will be safer than putting your money into 1 or 2 stocks, and better over the long run than buying a few bonds. Hope that helps a little.
-RS
RS said…
One more thought…when you say that you are saving for a house, is that with this money that you are talking about investing? Or is this separate?
If this money that you are investing if for a downpayment on a house, that makes it a little more difficult since I don’t know when you will need that money. You can always get the money, you could just get hit with higher taxes if you take it out too soon and the other factor is that you don’t know what the price you sell at will be when you need to sell it. For instance, if you decide to buy a house in a year, the price of the index fund could be down at that point and you would be forced to sell it low.
GIV said…
Take the plunge!
One tip, know what a (mutual) fund’s MER is. It stands for Management Expense Ratio. It’s how the fund manager gets paid, and if you ask me, the financial services industry’s #1 problem is not being upfront about how the people urging you to invest get their money.
MERs can be very crafty.
THANKS EVERYONE!!! My quest for financial knowledge continues.
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8 Responses to “It’s all in the comments”
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April 3rd, 2006 @ 4:00 pm
Hey Nicole,
I have a couple of posts that you might find helpful: Is Investing Risky? What is Risk? and The ABCs of Mutual Fund Loads.
If you are going to invest in mutual funds, be sure to understand the totaly expenses.
April 3rd, 2006 @ 7:03 pm
I think that Bonds have a place in a portfolio, including a young one. I am 28 and own some I Bonds-If you ever need it the money is there. Although I Bonds might not give the best return it is better then a traditional savings account and is locked away, for me I need it a little difficult to get to or it will be gone. Sometimes thinking outside the box is not the worst thing!
Go buy some I-Bonds and enjoy that the money will always be there! That is what I have to say.
April 3rd, 2006 @ 7:10 pm
To be honest, I think you should go with a All-In-One fund like the symbol VTIVX by Vanguard. It automatically rebalances and adjusts based on your retirment horizon. It’s far from perfect, but I think it’s very easy to do worse by simply picking various funds based on magazine covers and such. I’ve done lots of reading on this and I still considered it when doing my own portfolio. For more info, check out my post Just One Fund.
April 4th, 2006 @ 8:54 pm
This article from money magazine posted on CNN.com really helped me. In the last section of the article it has a section “what not to do with your money,” and in it I bonds are listed. I know you said you’re already headed away from the I bond direction, but overall this article helps give really detailed information about people in the same stage you and I are currently in with our finance level and knowledge. Hope it helps.
http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/04/01/8373374/index.htm
April 4th, 2006 @ 11:05 pm
I totally agree with the people who have said you need to know where your broker’s commission comes from. Additionally, I think if people are going to invest in stocks, they need to make sure they understand why their broker is suggesting a particular stock, and only invest if they believe in the company and it’s product or service. My husband’s cousin is our investment guy, and he’s suggested we buy lost of different companies stocks, all out of the right motives, but we averted two potential losers (including World Com) because we took the time to look at the companies and decide if we really feel like they are the right places for us to invest our money. My dad sells mutual funds, and we look at his advice just as closely. Even though our personal brokers have our best interests at heart, we still don’t want to feel like anyone talked us into buying anything we didn’t really believe in.
Anyway, best of luck, and the sooner you get started investing, the more time you have for your investment to grow!
April 5th, 2006 @ 1:15 am
New reader here, but you remind me of where I was just a couple of years ago. I could not stand the thought of my hard-earned money going down the tubes in a “volatile” market. I was inexperienced and totally out of my league so I decided to go to the “experts” and buy mutual funds. I have since learned that MOST of these fund managers lag behind the market! And what’s the difference between picking between thousands of stocks or thousands of mutual funds? Therefore, why not just buy the market? Why pay a high MER on poorly performing funds? That’s a double insult. I suggest buying ETFs (exchange traded funds). They are a basket of stocks that mirror a certain index (S&P 500, Dow Jones, etc.) They charge a pittance of an MER, since it doesn’t take rocket science to copy the stocks of the tracked index. This is called passive investing vs active investing of fund managers who pick and choose stocks. However, a large majority of mutual fund managers are closet indexers anyway so why pay the high MERs for doing nothing? Granted, some fund managers outperform the market, but again, how do you choose between thousands of mutual funds? Also, when you are checking out the prospectus of a mutual fund, look at the comparison of between the fund vs the appropriate index. For instance, it doesn’t make sense to say a US small growth fund outperformed the S&P 500. That might be fine, but how does it really compare to the Russell 2000 that tracks the smaller companies? Maybe the Russell had a banner year and that small growth fund was just average comparatively speaking. Anyway, just giving you more food for thought to add ETFs in your things to look over!
April 5th, 2006 @ 5:30 am
For getting started investing with small amounts of money, I highly recommend the following:
1) Stick to no-load mutual funds with low expense ratios. Families like Fidelity and Vanguard offer a good variety.
2) Read up on dollar cost averaging. Combining this with index mutual funds (like Vanguard Total Stock Market Index) is the a great way to get started.
3) If you don’t want to invest too much money at once, then look around for the lowest initial investment and some low regular investment (like $50 per month or per quarter). There’s nothing wrong with starting small to get comfortable with the idea first. The sooner the better.
4) For stock index mutual funds, invest whatever your comfortable with having socked away for a long time (at least 5 years, 10 years is better). Use cash, savings, CDs, and money market mutual funds for more short-term emergency stuff.
Good luck with your decisions!
April 5th, 2006 @ 3:59 pm
Hurray for looking for investment opportunities! Take your time with the research–you will definitely feel more comfortable in the end if you spend the time researching now. Hubby, especially, and I spent several months learning about investment opportunities and mutual funds, and then more time researching the mutual funds themselves, before investing. That research has paid off in peace of mind as well as in interest!