Getting started with $2000

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ramonekalsaw
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Getting started with $2000

Post by ramonekalsaw » Wed Mar 09, 2011 3:29 am

I know a young person who has $2000, who's interested in getting started with indexing. He's saving about $100 a month so won't have enough to buy a Vanguard fund until about a year from now.

What is the suggested route for a person at the beginning of the investment cycle to take?

Thanks.

Quarantine
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Post by Quarantine » Wed Mar 09, 2011 5:00 am

Not an expert here since I've only recently joined, but I'm also young and I started small - and the route that I went with is via Vanguard's ETFs. With ETFs, there are no minimum limits like the corresponding VG mutual funds have, plus you'd get a pretty low expense ratio similar to the Admiral funds too.

You'd have to ask him to read up on the comparisons between the ETFs and mutual funds before making a decision though.

I would suggest starting with VTI (Total Market Index) and VGIT (intermediate-term treasuries - these do not contain mortgage-backed securities) - the exact allocation is for him to decide.

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nisiprius
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Post by nisiprius » Wed Mar 09, 2011 7:04 am

The right, wise, and infuriating answer is "wait a year." It doesn't matter; in investing, patience is a virtue and the sooner he starts cultivating it, the better. In a 401(k) of course, start investing as soon as you can. In a brokerage account, well, it seems to me that most brokerages and fund companies have a surly attitude to accounts under, say, $10,000. Vanguard would probably dispute this and point to the STAR fund as their answer, see 3 below.

The easy answers are:

a) use ETFs instead of mutual funds. I hate to give that advice because I don't like ETFs and don't want to encourage new investors to start with them, because they put you into the world of daytime orders, put you at the levers of a machine made for short-term stock speculators instead of long-term investors, and a world where you are always looking at short term price charts instead of long term growth charts. Ugh. But using ETFs is perfectly rational and very effective. (With ETFs the minimum purchase is one share, which is around $50-$100. Commissions are low to begin with and most brokerages have some kind of deal on free purchases of some core ETF from some company. For example, Vanguard ETFs are free at Vanguard).

b) Go to a brokerage and fund company that acts as if they want smaller investors. There are probably others, and this is not a recommendation, and back around 2000 I joined Schwab when they teased me with low fees and left when they raised them--but Schwab seems to fit that description. And they're a great big name-brand safe-choice brokerage. Schwab has a serviceable lineup of Schwab index funds that have low expenses and a $100 purchase minimum. Their website says "$1,000 minimum, No account service fees."

c) Invest in the Vanguard STAR fund which has a $1,000 purchase minimum and is a good general-purpose all-size-fits-all starter fund, and exchange out into other funds when the account is big enough to meet the $3,000 purchase minimum on most funds and get the desired asset allocation.
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Post by livesoft » Wed Mar 09, 2011 7:29 am

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partisan
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Post by partisan » Wed Mar 09, 2011 9:10 am

Head on over to Fidelity and have them purchase the no fee ETFs. Their contribution won't be eaten up each money by a commission, sure the expense ratio is a bit higher, but if they're putting in $100 a month a $8 commission for a Vanguard ETF is a lot bigger chunk of their contribution than a .2% difference in the ER.

chaika
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Post by chaika » Wed Mar 09, 2011 4:24 pm

I like Vanguard's STAR fund VGSTX too, picked it for my daughter. $1000 minimum, currently about
39% US stock
21% foreign
35% bonds
5% cash.
per Morningstar

jpark1982
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Post by jpark1982 » Wed Mar 09, 2011 5:42 pm

He can pick the STAR fund from Vanguard like others have said, and do a transfer into another fund when he reaches the $3000 minimum. And since I assume it'll be in a tax sheltered account the tax consequences with the swap will be irrevalent.

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Taylor Larimore
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STAR fund ?

Post by Taylor Larimore » Wed Mar 09, 2011 6:09 pm

jpark1982 wrote:He can pick the STAR fund from Vanguard like others have said, and do a transfer into another fund when he reaches the $3000 minimum. And since I assume it'll be in a tax sheltered account the tax consequences with the swap will be irrevalent.
Hi jpark:

He may decide to keep STAR.

Many years ago I recommended Vanguard's STAR fund to a friend in similar circumstances. I just checked to find that Vanguard's STAR fund is in the top 13% of all funds in its category for 15-year return.
"Simplicity is the master key to financial success." -- Jack Bogle

jmbkb4
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Post by jmbkb4 » Wed Mar 09, 2011 6:49 pm

at scottrade, you can purchase VTSSX and other SIGNAL share classes with a minimum of $100.

ERs are as low as the Admiral shares.

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LazyNihilist
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Post by LazyNihilist » Wed Mar 09, 2011 6:57 pm

I'd recommend starting out at TD Ameritrade. They have 32 commission free ETF's for just Vanguard. And they don't have any annual fees. Make sure to use Limit Orders when purchasing the ETF's though.
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DocHolliday
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Post by DocHolliday » Wed Mar 09, 2011 7:03 pm

I would go with the STAR fund now. When $3000 is reached after further contributions, your friend can switch to a different fund if so desired. That STAR fund is a great way to start investing.

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Swamproot
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Post by Swamproot » Thu Mar 10, 2011 12:59 pm

I started at T. Rowe Price. You can open an account in a fund for only $50 if you set up an automatic deposit every month ($50 min) and agree to emailed statements. There is a $10 yearly fee for each fund under $5K but their ER's aren't too bad.

But that was before commission free etfs. If they had been around at the time I would have went that route, but I share nisiprius' concerns about recommending that to a newbie.

I also agree with them patience is something to be cultivated, but as a younger person, I might not have been trustworthy with that 2k sitting in cash in my bank account (Hello Plasma TV!). So there may be some value in getting them started now, before life makes another plan for the money.

But if I did have have $2k when I started, I would have considered STAR.

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Post by livesoft » Thu Mar 10, 2011 1:01 pm

jmbkb4 wrote:at scottrade, you can purchase VTSSX and other SIGNAL share classes with a minimum of $100.

ERs are as low as the Admiral shares.
OK, what commission does Scottrade charge me if I buy $100 of VTSSX?
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brianca
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STAR

Post by brianca » Thu Mar 17, 2011 1:35 am

I have $2,500 in a 403b without a match and high fees, I want to roll over to Vanguard. Would the STAR fund automatically give me a well diversified portfolio in several asset classes similar to the Bill Schultheis's "Coffeehouse" portfolio?

I found this info on the site:
The Vanguard STAR fund (VGSTX) is a balanced fund composed of 60% stocks, 40% bonds. Vanguard notes that it is "the only Vanguard fund that has a required minimum investment of $1,000"—most have a minimum of $3,000, some even higher. Therefore, it is sometimes suggested in the Bogleheads forum as a suitable mutual fund for investors who are just getting started and cannot meet a $3,000 minimum.
The STAR fund is a fund-of-funds. The STAR fund invests in eleven Vanguard mutual funds, all of which are actively managed. It has an expense ratio of 0.34%, typical of Vanguard's expense ratios for its active funds and low by general industry standards, but high compared to index funds.

brianca
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STAR

Post by brianca » Thu Mar 17, 2011 2:10 am

I see that STAR has a SEC yield of 2.27% where as my 403b is in a bullish market right now. As shown below.

Would it makes sense to move to STAR considering these 2/28/11 returns even though the ER are very high?


* Delaware Diversified Income Fund Class C Bond Fund (25% of port)
DPCFX $9.24
ER 1.72
1 YR 6.38% 3 YR 7.79% 5 YR 7.57%


* BlackRock Global Allocation Fund Inc. (25% of port)
MCLOX $18.71
ER 1.96
1 YR 14.20% 3 YR 2.54% 5 YR 6.46%


* Wells Fargo Adv Strategic Lg Cap Gr C Growth (25% of port)
ESGTX $30.06
ER 2.04
1 YR 23.40% 3 YR 5.57% 5 YR 4.51%

* Ivy Science and Technology Fund C Growth ( 25% of port)
WSTCX $31.58
ER 2.28
1 YR 24.73% 3 YR 9.22% 5 YR 8.36%

Thank you,

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anthau
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Post by anthau » Thu Mar 17, 2011 9:33 am

livesoft wrote:
jmbkb4 wrote:at scottrade, you can purchase VTSSX and other SIGNAL share classes with a minimum of $100.

ERs are as low as the Admiral shares.
OK, what commission does Scottrade charge me if I buy $100 of VTSSX?
$17. :shock: I'd say the better Scottrade approach would be DWS Equity 500 Index Fund (BTIEX) [ER 0.27] and DWS US Bond Index Fund (BONSX) [ER 0.34] (both NTF funds).
Best, | | Anth

sjb19
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Post by sjb19 » Thu Mar 17, 2011 9:39 am

That should clear it up. You got about 5 different answers from what I can tell.

I vote for STAR as well. Good fund, and no need to add the temptation to trade excessively at a discount broker, which may be especially strong in a young and/or naive investor.

brianca
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I smell a rat...

Post by brianca » Thu Mar 17, 2011 3:58 pm

I learned from IRS and 403bwise that I cannot roll over from 403b to an IRA while still employed.

Would I be able to rollover from a 401k to IRA while still employed?

My company went from a 403b to 401k and now back to 403b. I wonder if the broker talked the company into this because they knew the difficulty of rolling over while still employed?

I smell a rat....

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White Coat Investor
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Re: Getting started with $2000

Post by White Coat Investor » Fri Mar 18, 2011 11:23 am

ramonekalsaw wrote:I know a young person who has $2000, who's interested in getting started with indexing. He's saving about $100 a month so won't have enough to buy a Vanguard fund until about a year from now.

What is the suggested route for a person at the beginning of the investment cycle to take?

Thanks.
ETFs are fine. STAR is fine too. Waiting 10 more months until you have $3K also fine. But for someone with only $2K and who is only able to save $100 a month (remember maxing out just one Roth is $417 a month, I would concentrate on increasing earning power (education, starting a business etc), increasing savings rate, and personal finance/investing education. The important thing isn't "indexing", the important thing is getting the portfolio to critical mass ASAP. This involves earnings and saving much more than investing.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

livesoft
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Re: I smell a rat...

Post by livesoft » Fri Mar 18, 2011 11:36 am

brianca wrote:I learned from IRS and 403bwise that I cannot roll over from 403b to an IRA while still employed.

Would I be able to rollover from a 401k to IRA while still employed?
In general: No. Many 401(k) plans allow an in-service (i.e. still employed) rollover if you are older than 59.5 years old.

I don't smell any rats.
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DiscoBunny1979
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Post by DiscoBunny1979 » Fri Mar 18, 2011 12:08 pm

I posted a few days ago concerning the STAR Fund and I'd like to repeat what I've posted there over here. The reason . . . I believe many folks view the STAR Fund as a starter fund. I think that Vanguard views the fund differently . . . by stating in the Annual Report that the fund is a "well balanced and diversified portfolio" and can be used to invest for one's "long-term goals" based on "risk tolerance and time horizon".

The STAR Fund with it's low minimujm, might seem like a marketing strategy to attact new investors, but it's actually a fund established to provide a less volatile option for long-term use as part of an investment plan or stand alone choice. I believe using this fund for only a few months or just a year is not what this fund is intended for because the "investor' won't get the benefits of it's long-term potential.

So. . .folks are suppose to "invest" according to their original Personal Investment Plan - right? Therefore choosing a fund like STAR just because it has a low entry minimum doesn't mean it's the right choice for a short-term placement of money.

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hollowcave2
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STAR

Post by hollowcave2 » Fri Mar 18, 2011 12:12 pm

Begin now with the STAR fund ($1K minimum) and keep investing until you have more money to have more options. The key is to begin now.

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Post by jlieu » Sat Mar 19, 2011 12:31 pm

Similar to the OP here, I have about a $1K I'm looking to invest somewhere into a Roth IRA for this tax year. Currently 24 in Grad School expecting to graduate by the end of the summer.

I have a 401K (8-9k worth) from a former employee that I have to contact and do some paperwork in order to get process, so I doubt it would great done by April 18. Since I had a balance of over $5k, I was allowed to keep if I wanted to (was 'younger' than now, so didn't have much priority to look for a place to roll it over to).

My objective is to eventually rollover the 401K and $1K to Vanguard. I know at $10K+ the $20 service fee @ Vanguard is waived and some Vanguard funds become cheaper. So given that situation, I'm looking at either the STAR fund or Vanguard ETFs through Ameritrade. So, my questions are whether it would be better to:

A. STAR fund - would it be optimal to invest the money into the STAR fund and incur the service fee (I guess this really depends on whether the fund performance would meet/exceed the fees in the time invested)

B. Ameritrade - Invest money in commission-free Vanguard ETFs with higher risk and either keep it there (as a separate account) or transfer out to Vanguard after 401K rolled over (incurs a $50 transfer fee).

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Taylor Larimore
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Need to start your own conversation topic

Post by Taylor Larimore » Sat Mar 19, 2011 2:10 pm

Hi Jlieu:

Welcome to the Bogleheads Forum!

I know you didn't mean to hijack this thread, but it will be much better, and you will get more replies, if you start your own thread. You are certain to receive helpful suggestions.

Thank you.
"Simplicity is the master key to financial success." -- Jack Bogle

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White Coat Investor
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Post by White Coat Investor » Sat Mar 19, 2011 2:20 pm

jlieu wrote:Similar to the OP here, I have about a $1K I'm looking to invest somewhere into a Roth IRA for this tax year. Currently 24 in Grad School expecting to graduate by the end of the summer.

I have a 401K (8-9k worth) from a former employee that I have to contact and do some paperwork in order to get process, so I doubt it would great done by April 18. Since I had a balance of over $5k, I was allowed to keep if I wanted to (was 'younger' than now, so didn't have much priority to look for a place to roll it over to).

My objective is to eventually rollover the 401K and $1K to Vanguard. I know at $10K+ the $20 service fee @ Vanguard is waived and some Vanguard funds become cheaper. So given that situation, I'm looking at either the STAR fund or Vanguard ETFs through Ameritrade. So, my questions are whether it would be better to:

A. STAR fund - would it be optimal to invest the money into the STAR fund and incur the service fee (I guess this really depends on whether the fund performance would meet/exceed the fees in the time invested)

B. Ameritrade - Invest money in commission-free Vanguard ETFs with higher risk and either keep it there (as a separate account) or transfer out to Vanguard after 401K rolled over (incurs a $50 transfer fee).
You're definitely thread jacking, but here's a quick answer anyway.

With $10K there's no reason to use STAR IMHO. I'd just start buying the regular funds you want to round out your AA. $3K is the minimum on most funds. You an avoid the little nuisance fees by signing up for e-statements. And the lower ER for admiral is silly to worry about at this stage of the game. Say your admiral fund ER is 0.07 and your investor fund ER is 0.18. On $10K in assets we're talking about $12 a year. Not worth getting a fund you don't really want over. The $50 Ameritrade fee is reason enough not to open an account there. VG does NOT hit you with a fee when you transfer assets out (as if anyone ever does anyway.) :)
Last edited by White Coat Investor on Sat Mar 19, 2011 5:26 pm, edited 1 time in total.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

jlieu
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Re: Need to start your own conversation topic

Post by jlieu » Sat Mar 19, 2011 4:33 pm

Taylor Larimore wrote:Hi Jlieu:

Welcome to the Bogleheads Forum!

I know you didn't mean to hijack this thread, but it will be much better, and you will get more replies, if you start your own thread. You are certain to receive helpful suggestions.

Thank you.
Ah okay, I apologize about that. I appreciate the heads-up and quick reply. I'll avoid threadjacking in the future. Thanks again.

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Sylvester the Investor
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Re: Getting started with $2000

Post by Sylvester the Investor » Sun Mar 20, 2011 2:25 am

ramonekalsaw wrote:I know a young person who has $2000, who's interested in getting started with indexing. He's saving about $100 a month so won't have enough to buy a Vanguard fund until about a year from now.

What is the suggested route for a person at the beginning of the investment cycle to take?

Thanks.

Step 1 - Join Schwab.
Step 2 - Buy SCHB ETF It is US Broad Market. No trading fees, ER 0.06%. Lower than Vanguard.

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