11

I am a first time investor. I would like to invest small and gradually build up depending on how I fare in the stock market. I've been following the stock market for a couple of years and have read up a lot about it the options available for indexing. With the amount of money I am willing to invest(about 2000-3000), I think Index Funds are the right fit for me. I do not want to be taking too many risks this early so I'd rather start small and then adjust accordingly.

I have heard a lot about Vanguard and Fidelity index funds and want to figure out the best one and invest in the best one. I know that when investing in funds the cost associated with the funds is a major consideration and hence I want to invest in index funds.

If you were me, what do you see wrong with my approach and how would you go about investing in funds?

13

Congratulations on deciding to save money and choosing to invest it.

One thing to know about mutual funds including index funds is that they typically require a minimum investment of a few thousand dollars, $3000 being a typical amount, unless the investment is in an IRA in which case $1000 might be a minimum. In some cases, automated monthly investments of $50 or $100 might need to be set up if you are beginning with a small balance.

There is nothing wrong with your approach. You now should go and look at the various requirements for specific index funds. The Fidelity and Vanguard families are good choices and both offer very low-cost index funds to choose from, but different funds can have different requirements regarding minimum investments etc. You also have a choice of which index you want to follow, the S&P 500 Index, MidCap Indexes, Small-Cap Indexes, Total Stock Market Indexes etc., but your choice might be limited until you have more money to invest because of minimum investment rules etc.

Most important, after you have made your choice, I urge you to not look every day, or even every month, to see how your investment is doing. You will save yourself a lot of anxiety and will save yourself from making wrong decisions. Far too many investors ignore the maxim "Buy Low, Sell High" and pull money out of what should be long-term investments at the first flicker of a downturn and end up buying high and selling low.

Finally, the time is approaching when most stock funds will be declaring dividends and capital gains distributions. If you invest now, you may end up with a paper profit on which you will have to pay taxes (in non-tax-advantaged accounts) on your 2012 tax return (this is called "buying a dividend"), and so you might want to spend some time investigating now, but actually make the investment in late December after your chosen fund has made its distributions (the date for this will be on the fund's web site) or in early 2013.

  • 3
    +1 - Also don't forget to compare the cost of the funds you invest in. With no other method of comparison, go for the lower cost. – MrChrister Oct 22 '12 at 18:12

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .