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By Bob Moeller
WEAC Member Benefits
December 2005
Financial
Planning Seminars
Achieving
Financial Independence
Many members regard investing money with apprehension. They know it is important that they do a good job of it, but they feel it is too complicated, and many feel they don't want to spend the time mastering investments. So they trust the wrong people.
They end up in mediocre investments or even bad investments. I can't tell you how many times I've heard the comment, "But the salesperson used to teach in my school." Apparently this fact makes people more expert or trustworthy in the eyes of the buyer.
The stock market in particular scares people. It can be complex, but over the decades a few major developments have made it easier. No question one of the biggest aids was the development of the mutual fund.
At last an investor did not have to worry about picking individual stocks but could entrust his or her funds to a fund manager who would do the research, buy and sell the stocks, and charge just a small annual fee.
I recently read that there are more than 17,000 mutual funds. That means that researching which fund to buy is now as complicated as deciding on individual stocks.
Arguably you could do all of your investing with just two mutual funds. Vanguard has a Total Market Index Fund. It invests in 3,822 different stocks. It indeed represents the stock market. Vanguard also has a Total Bond Market Index Fund. It invests in 2,373 different bonds. These funds have no sales charges, no withdrawal charges, and annual fees of .19% and .20%.
So you can manage $10,000 for total costs of about $20 per year. You could use your age to represent the percentage of money you put in the bond fund and rebalance just once a year, and you would most likely do a lot better than paying some adviser to pick out higher-cost mutual funds, and almost certainly better than paying the high costs of insurance company tax-sheltered annuities.
Other no-load fund families like Fidelity have similar funds. But maybe you would like a little international stock. Or maybe you prefer CDs to bond funds. (I do when interest rates are very low and rising as they are now). So it gets just a little more complicated.
Recently, mutual funds have taken steps to make it even easier. Essentially they say, "Just tell us when you want to retire, and we will invest your money for you." Or you simply tell them what kind of investor you want to be with these funds - aggressive, conservative, income-oriented, etc. - and they will invest for you.
As an example, Vanguard has a Target Retirement 2045 Fund, which is designed for investors age 20 or so. It invests 70% in the Total Stock Market Fund, 12% in the Total Bond Fund, 12% in the European Stock Index Fund, and 5.6% in the Pacific Stock Index Fund. The allocation will be automatically adjusted as you grow older and closer to retirement. Contrast this to their Target Retirement 2015 Fund designed for 50 (or so) year olds. This fund has 50% in the Total Bond Fund (note how bonds increase as you get older), lesser amounts in the other three, and a small 3% in the Inflation Protected Securities Fund.
Again, the basic principle is that your investments are automatically shifted as you get older. You still want to initially do a little checking before making your decision. The Fidelity 2015 Fund has 60% in equities vs. Vanguard's 50% and T. Rowe Price's 71%. Vanguard is regarded as the most conservative generally. Note also the Vanguard's fees are generally around .2% per year, while fees for Fidelity and T. Rowe Price range around .7%.
All three would be less than the typical mutual fund. No matter which fund you choose, the information on what they invest in is readily available, and as long as you use a good no-load fund family like these, there are never any withdrawal penalties if you decide to move the money. Toll-free contact numbers are 1-800-662-7447 for Vanguard, 1-800-544-8544 for Fidelity, and 1-800-638-5660 for T. Rowe Price. So far I have not seen any TSAs that offer this kind of product. If they do start, make sure you know exactly what costs are involved. The WEA Trust TSA informs me they are considering offering this approach.
Investment Tips
Here are a few tips on making your investment life simpler:
Posted December 1, 2005