I feel a little dumb asking this but aside from the basic financial literary skills (budget, use cash, don't take on debt, fully funded programs and opportunities all the way, and have emergency fund) I'm having a hard time understanding investing. I do get the importance of a RothIRA and was thinking TDAmeritrade (already have accounts with TD) or CharlesSchwaab but looking for other suggestions. Beyond that should I be looking into ETF's (still don't understand how this is different from a mutual fund) or Index Funds? Then would a service like Vanguagrd make more sense as it provides all of these services (RothIRA, Indexfunds, etc). Sorry if this was confusing and thanks from a bumbling grad student!
Mutual funds and etfs are both pools of stocks/bonds that have a single share price.
Differences:
Mutual funds’ prices do not change throughout the day. They only change at close of market. Usually mutual funds charge several fees (ie loads) to cover their analysts picking the combination of assets. They also charge a percentage based upon performance. Regulations indicate that when these fees or commissions are lower than like 1%, they can say they are no-load, no-commmison. At these timeframes, 1-3% can be devastating to your retirement. Usually trading is a bit slow because of how the price is set (and some ownership stuff). There is usually also a minimum buy in for mutual funds.
Etfs change throughout the day based upon demand, which usually mirrors the performance of the value of the pool of assets. Typically the fees are MUCH lower than mutual funds. Trading is much more rapid, so if you want to get rid of some shares you can accomplish that ASAP. There’s some increased volatility but some better tax stuff for etfs. There are also many many more small etfs with varying degrees of legitimacy.
Index funds can be mutual funds or etfs. They just buy the stocks that make up whatever index. SPY is an etf index fund that has stocks in every company listed in the s&p500, which is a type of index of how the market is performing. Vanguard has some funds that follow the Dow Jones industrial index which is another index of how the market/economy is performing. (Dow Jones “weighs” some industries and uses 30 companies more than others while the s&p doesn’t weight stuff but uses 505 companies.).
In general, the stock market will go up 10% per year ON AVERAGE during a 30 year period, but inflation will average 3% per year. This is where the 7% real returns figure comes from.
Bonds are basically when a company asks for a loan from you. Typically bonds pay a set interest rate which are bad if the company is a well established one, because they can get money from other sources at higher rates. When the stock market goes down, bonds initially go down but then go relatively way up.
The basic advice is to have holding in an index fund for US stocks, an bond fund, and an index fund for international markets.
Vanguard is a favorite for most because they literally got sued because their fees and commissions were so low that other firms thought it wasn’t fair. They also tend to do as well or better than other firms.
