HELP - Mutual Fund investing Question

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WilliamRice
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Joined: Fri Nov 13, 2009 10:20 am

HELP - Mutual Fund investing Question

Post by WilliamRice »

I am very new at this. I invested in a Vanguard Wellington Fund Investor Shares, a big lump sum in fact. Since then I usually deposit $200.00 a month in it. Is that the basic idea? How do I know how long to hold it for. I prefer just to keep putting in money and not touch it because I don't need to. I just am try to understand because I always read about things like "If you invest in a mutual fund now, in 20-30 years it will really pay off. I guess I'm just confused a bit and want to make sure that I am doing the "mutual fund" thing correctly. Like I said I am really new at this. By the way. I am in my mid-20's and have a rothIRA and a 401k. Any help or guidance would be great. Thanks and glad to be here.

_William
livesoft
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Post by livesoft »

You should probably try to read some books before going much further. The internet and forums is a good way to get confused. Start with some books.

http://www.bogleheads.org/wiki/Books:_R ... nd_Reviews
retiredjg
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Post by retiredjg »

Hi William, welcome to the forum!

Do read a book or two. I think Bogleheads' Guide to Investing and/or Bogleheads' Guide to Retirement (just out a few weeks ago) is a good place to start.
I invested in a Vanguard Wellington Fund Investor Shares, a big lump sum in fact. Since then I usually deposit $200.00 a month in it. Is that the basic idea? How do I know how long to hold it for. I prefer just to keep putting in money and not touch it because I don't need to.
Yes, this is the idea if you are investing for retirement. Put money in, add money on a regular basis, don't touch it (other than portfolio maintenance) till you need it in 30 or 40 years.

Since you have a Roth IRA and a 401k, Wellington (as wonderful as it is) may not be your best choice. Take a look at the two links at the bottom of this post for how to get advice on setting up your entire retirement portfolio for best results.

You'll notice I said "retirement" a couple of times above. You also need to save money for things other than retirement.

1) Before anything else, you need an emergency fund of 3 to 12 months of expenses in case you are laid off, have car repair, need a new washing machine, have medical bills, etc. It is your emergency fund that keeps these urgent expenses off your credit card at high interest rates - something you may never dig out of. Your emergency fund should be kept in cash/equivalents like a high yield savings account or a money market account. This money should not be in stocks and bonds because it may lose value at just the time you need it most.

2) If you are saving money for a house or car, this also needs to be separate from your retirement money (although it does not have to be physically separate). Do NOT use your retirement money for things like a house or car.

Please see Bogleheads Financial Start-Up Kit on the Bogleheads Wiki for info about basic financial needs and decisions. But this does not mean you don't need to read a good book or two.
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ruralavalon
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Post by ruralavalon »

Welcome to the forum :) .

Congratulations on getting started at such a young age. Wellington will serve you well while you educate yourself.

Of the many good books listed on the wiki, I would suggest The Bogleheads' Guide to Investing as a good introduction that covers all the basics (and more) without being unduly technical. Don't try to read them all, that would only get you into information overload.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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nisiprius
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Post by nisiprius »

What I want to stress is that what you're doing now is a great start and you shouldn't change anything in a hurry. The most important things are to get the savings habit, which you have, and to invest in some reasonable mutual fund with some reasonable balance of stocks and funds, which you are doing. You do need to understand more about what you're doing.

What you need to understand for starters is this. The "mutual fund thing" is a convenient way of investing in a very large package of many stocks and many bonds. Stocks and bonds fluctuate in value, sometimes a lot, so it is very different from putting your money into a savings account.

Because stocks fluctuate much more than bonds, the biggest thing you need to decide is your "asset allocation," and the most important aspect of asset allocation is "what percentage of my portfolio is in stocks?"

So let me ask you a question.

What percentage of the money you put into the Wellington fund is invested in stocks?

If you don't know, you should spend fifteen minutes on Vanguard's website and find out. Or you should dig out the prospectus, which you should have been given at some point, and read enough of it to find out.

The answer turns out to be that Wellington is about 2/3 stocks and 1/3 bonds.

Now, the next question, and you can take your time answering it but you need to answer it eventually is: how much of your long-term investment should be in stocks? One reason I say not to worry or change anything is that most advisors would say that 2/3 stocks, 1/3 bonds is reasonable for your age, and if it is wrong, it is erring on the side of safety.

But safety is a relative thing. The second thing you should do is look at this chart. I got it from the Vanguard website and you should poke around there until you can find it for yourself. It shows what would have happened if you'd put $10,000 into the Wellington fund ten years ago. That's the blue line. The yellow line is what would have happened in a money market account, a very safe investment that is roughly similar to, but probably a tad better than what your money would have earned in the bank.

Image

Think very hard about that chart and what it means. This is how a 2/3-stocks mutual fund like Wellington behaves. The up-and-down fluctuations are no joke. The chart really shows it in a nutshell. At times, Wellington was far ahead of the money market account, but not always.
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