Not sure what particular funds should be examined, including funds that track the S&P. Is it smart for me at a young age to choose a fund tracking the S&P?
-
1Do you have access to a 401K with a company match?– mhoran_psprepCommented Nov 20, 2013 at 1:53
-
A possibly trivial point, but are you employed? Contributions to an IRA require you to have earned income (wages from a job or self-employment income), but at 23 (25 now, I guess), you might be a graduate student on a fellowship..... See, for example, this answer for some details.– Dilip SarwateCommented Oct 21, 2015 at 16:04
Add a comment
|
3 Answers
Over the long term, expense is a killer. An index fund that has a sub .10% is going to outperform a similar fund over time, if that fund has a high expense.
My answer will ignore some important things, like asset allocation. At 23, with a $5500 Roth limit, a few years deposits in a low cost S&P fund isn't a bad way to start. $20K or so later, you can start on a path to diversification.
In my opinion, Target date funds are a bit of a gimmick. Do the math, VFFVX sports a .18% per year expense vs VOO, the .05% S&P ETF. Over 40 years, the .05% will cost you 2% vs 7% for the .18% expense. This may not seem like much now, but when you are 60 and your retirement accounts are north of $3M, that's a difference of $150K.
answered Nov 20, 2013 at 0:28
JTP - Apologise to Monica♦JTP - Apologise to Monica
173k34 gold badges297 silver badges560 bronze badges
-
I know this post is years old and I'm just seeing it because of the recent edit, but you're somewhat overestimating the final cost of an expense ratio. You seem to be calculating on the assumption that all forty years of contributions will be subject to all forty years of expense, which isn't the case. I agree with your general point, though.– user27684Commented Oct 21, 2015 at 21:18
-
1Perhaps, but in my case, I deposited starting at 20, and retired at 50. I'm spending the first deposits 30 years later, and the deposits just before I retired at age 80-90. So, while I might have exaggerated a bit, it's not too far off. Commented Oct 21, 2015 at 21:52
-
Good point about expenses in the years after retirement. I hadn't considered that.– user27684Commented Oct 21, 2015 at 22:24
Suggestions:
Know how you feel about winning/losing. Fund choices are just as much an emotional battle as a mental battle. You may know that an index will bounce back, but emotions can easily trump what you know. You would not believe how many people I know sold their index funds in January of 2009. If losing hurts really bad, you may want to allocate some money into something that feels more stable.
Don't believe what someone says just cuz. For instance, most advice advises index funds, which in most cases is true, yet in my case, four out of my 52 mutual fund choices in my 401k have killed the S&P 500 index, Dow Jones index, and Nasdaq index (inception dates over 25 years) even when you include all the fees and loads associated with them (you can get this information). If you don't know how to compare or don't want to, then index funds are your best choice; likewise, if your comparison shows index funds are the best, choose them. Due diligence.
Automating retirement, especially for someone who doesn't want to worry, can be a great way to minimize errors, just make sure you want to. Some companies will offer rebalance tools where you can have funds rebalanced automatically and new money coming in invested automatically. Some example of this here and here, just recall point 2.
-
3To your point #2 - In the long run, managed funds lag the S&P. A 4/52 (Aces in a deck, anyone?) chance of beating the S&P doesn't have the same appeal as a 100% chance of lagging by precisely .05%. If you are suggesting that one should simply buy just those 4, I'd ask, why does anyone keep a dime in the other 48? Commented Nov 21, 2013 at 21:18
-
1Sure, any one fund may beat the index over any given time period. But how do you know which? By the time you diversify enough to cover all the possibilities, you're pretty close to just tracking the index again... Or you're accepting more risk in exchange for the possible highter reward, which is fine if that's really what you want to do but isn't an inherently better answer just a different one. Yes, when young you can accept more risk -- less to lose and more time to recover -- but the standard advice about fund mixture accounts for thst.– keshlamCommented Oct 21, 2015 at 14:21
The fund or fund mix you choose should be:
- cheap (in terms of both expense ratio and other fees)
- risk-heavy, and therefore stock-heavy (probably 100% stocks), because you have a very long time horizon until your retirement and using your risk tolerance will lead to higher returns
- (but be aware that if you don't have an emergency fund, the statement about being risk-tolerant is untrue. you should have one first.)
- reasonably diversified
Any S&P 500 Index Fund is an excellent way to achieve all three. It would be an excellent place to store your money. Feel free to go ahead and do it. However, there are some other ways to achieve these properties, including:
Target-date retirement funds which will change asset allocation as you near retirement without any further input from you. (Example: Vanguard Target Retirement 2055, VFFVX). If you don't want to think about your asset allocation ever again, put all your retirement money into one of these.
Funds which attempt to invest in the entire stock market, including stocks outside the S&P500 (e.g. Vanguard Total Stock Market Index, VSTAX) or even stocks outside the US (e.g. Vanguard Total World Stock Index Fund, VTWSX). These are a little riskier, a little better diversified, and will probably end up with better returns over the next several decades.
Note. I have identified three Vanguard funds because I know they are cheap. You are certainly welcome to seek other funds, using Research. You would also be well-advised to validate for yourself that these funds actually meet your needs, also using Research.