How to start investing in low cost index funds
Previously we outlined how to begin investing with 5 actionable steps. Begin with this article if you do not currently have an investing account. After reading that article and setting up an account, then you may proceed to the information below.
After choosing the type of account that you would like to transfer your savings into, you have some options once the money arrives for what you would like to invest in. You could try to pick individual stocks and become the next Warren Buffet, but I strongly encourage you to avoid this temptation. Rather, I like to keep 90% of my money exposed to a broad array of stocks which typically earn 8-10% per year over the last 200 plus years. How do I do this? Low cost index fund investing.
The choice is yours. Consult a financial advisor immediately if you are not willing to embark on this journey alone and accept the full responsibility of managing your own money. For those so inclined, managing your own money has the ability to yield superior results, if you are willing to become an expert in personal finance along the way (yet another reason to start reading).
My favorite companies to open investing accounts with are Vanguard and Fidelity. They offer some of the lowest cost index funds that give you the opportunity to participate in years and years of compound interest, without all the added fees that active mutual funds typically carry.
Be advised, not all companies will offer top notch low cost index funds. Often times, especially in 401(k) and 403(b) plans, your options will be very limited. I believe that you can still find good low cost options that expose you to a broad array of stock ownership by following some simple tips outlined below.
How To Find Good Index Funds Regardless of What Company Your Investment Account Is With
When considering index fund investing, here is primarily what you are looking for.
1. The fund should track a major index
Choosing Fund Types
When index investing, you have as few different options into what types of funds to choose from.
You can invest in exchange traded funds (ETFs) that trade in real-time like other individual stocks. Or you may choose a index mutual fund which typically trades once per day at the closing price. Either one is a great choice as long as you keep the expense ratio under 0.1%. Vanguard and Fidelity have great index mutual fund options and iShares, as well as Fidelity, have some great ETFs.
There are additional options for those who wish to further diversify such as small cap and mid cap index funds which place greater emphasis on smaller and medium sized companies. My personal preference is to stay with large cap which is what an S&P 500 index will offer. If you were to choose an ETF or an index mutual fund that tracks the Total Market, you will inherently diversify into small cap and mid cap companies as well since it carries large, medium, and small companies in it's portfolio.
Speak with you financial professional regarding the above options when investing. If choosing to DIY, check out my resources page for books on how I learned to start investing without needing to pay a financial advisor.