What are some good investment options?

[UserNameNeeded]

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I just got word that my extended family is giving me a surprisingly large graduation gift and instead of putting it towards medical school directly, since it's really not enough to take a big enough dent out of a $30,000+ yearly mountain, I thought I should look toward investing it for a rainy day (like loan repayment, 4-7 years from now).

I'm thinking of mutual funds, but there's soooooo many, but I don't know where I'd start! What company's good (Charles Schwab? Fidelity? Vanguard? Edward Jones?)? Which mutual funds are good? Any of you more financially savvy peeps got any recommendations?

Thanks, as always! 👍

 

[heech]

I guess it's you and me chatting it up on this forum tonight. 🙂

Mutual funds aren't a great choice, especially since you're saving it for a rainy day. There are expenses associated either with getting in or getting out of most funds. I wouldn't recomend a mutual fund unless you were going to hold it for a while, since that allows you to amortize these costs.

My take is, your best option might be an ETF (exchange-traded fund). These are easy to get in, easy to get out, but are still very broadly diversified. You can buy something like QQQQ for example, which is the largest 100 companies listed in the Nasdaq.

http://finance.yahoo.com/etf/browser/tv

 

[UserNameNeeded]

Hehe, yea...I'm an insomniac tonight it seems.

Are ETF the same as index funds? If it is, then aren't those not actively managed? I really don't see the US indices experiencing a strong upward trend during the next few years.

I looked into Charles Schwab and Fidelity and both offer a sizeable selection of no fee/no load funds. I would be holding those funds, for sure, for 4 years (7 years if I get deferment on student loans-- and even longer if I decide to do a loan forgiveness program) and when I'd start to cash out, I would think/hope I would be doing it a little at a time and not cash out the whole fund at once.

 

[rg2000]

I have been invested in a mutual fund through T. Rowe Price for the last couple years and could not be happier with my choice. There are a lot of good funds out there with no fees in or out (like mine for instance). I am very conservative with my money so I would recommend a low volitility fund. Oakmark, T. Rowe Price, Dodge & Cox, Vanguard are all great companies that offer slow growth, low risk funds. A great website to compare these funds is morningstar.com. Click on the "funds" links and you can view annual returns, graphs, etc. There is also a link to the top performing funds. I tend to look at the funds that show growth every year especially during the 2001-2002 down year. A fund that grew during '01-'02 has solid holdings and good management. You may also want to look at some international funds - many analyst believe they will outperform funds exclusively invested in the US market. If you do decide on international, Dodge & Cox International Fund is one of the best, check it out for yourself. I think I will stop there, good luck.

 

[heech]

ETFs are literally just "exchange traded funds", and they can be actively managed or passively linked to an index. Their only major distinction from traditional mutual funds is just how you enter/exit into an investment. It removes the book-keeping mutual funds needed to worry about when cash is flowing in or out... typically a percentage point or two.

As far as what's better, passive or actively managed indexes.. I haven't seen recent research on this, but I was taught (not that long ago) that passive index consistently out-perform 75% of actively managed funds. There's very little conclusive research that mutual fund managers are "good" stock pickers; in fact, the research seems to show 3/4 of mutual fund managers are worse stock pickers than a monkey throwing darts.

In my own personal case, I buy only broadly diversified index funds. If I feel strongly about a particular industry/region, I can buy into a specific ETF that targets it specifically. I don't trust stock-pickers; the statistics aren't good.

 

[UserNameNeeded]

rg2000, thanks for those names. I'll definitely be researching those!!

As far as what's better, passive or actively managed indexes.. I haven't seen recent research on this, but I was taught (not that long ago) that passive index consistently out-perform 75% of actively managed funds. There's very little conclusive research that mutual fund managers are "good" stock pickers; in fact, the research seems to show 3/4 of mutual fund managers are worse stock pickers than a monkey throwing darts.

Wow. Really? 😱

That's pretty shocking. Is that outperformance based on a long period of time, like 20+ years? What I'm worried about is the fact that a lot of markets seem to oscillate at around the same level (Nikkei during the 1990s) for a long time with no upward momentum. So a decade could pass and you'd still have around the same amount money in the market as you did initially, in those cases.

 

[Buckeye(OH)]

you will find some good insight @ morningstar.com


These are the guys that rate funds.....in a relatively unbiased manner.

 

[heech]

Yes, those numbers (most mutual fund managers under-perform the index) are legitimate and have been proven over decades. I think the Motley Fool guys used to really promote those numbers too, in their book/site (as proof the average joe should be picking the stocks rather than relying on mutual fund managers)... but I heard it in the context of an investments class.

And yes, the stock market is highly volatile. You really can't under-estimate how volatile. As I said before, average annual returns are ~14% over the past ~100 years... but if you look at the numbers, if you happened to miss out on the market for something like 5-10 of those 100 years (if you were invested for 90 rather than all 100 years), your returns would be far less.

And Buckeye, morningstar.com ranks funds strictly on the basis of returns (+ statistical measures like 'volatility', along with a few calculated ratios like alpha/beta... but they're all similar).


But like any good prospectus will tell you, past performance does not predict future returns. Let me give you an example:

- I have 1000 monkeys.

- Each monkey makes one investment decision per year (maybe by throwing darts, maybe by flinging poo). Each investment decision has a 50% chance of being "above" market average, or 50% of being "below" market average. Pretty fair, right?

- These monkeys work for me for 10 years, flinging poo once a year.

- Just based on pure statistics alone, at least 1 of these monkeys will have picked the winner *every* year, for 10 years. 10 monkeys will have been right 9+ out of 10 years. 55 monkeys would've been right 8+ out of 10 years.

If you were to look at their Morningstar rating, these would be 5-star, and they'd look like absolute geniuses... 10 years of above-market performance? Sign me up!

That's not claiming all mutual fund managers are monkeys. But some clearly could be. The problem, from an investor point of view, is that it's nearly impossible to distinguish between one of my monkeys and a quality fund manager based on past performance.

 

[UserNameNeeded]

You guys are great.

I talked to a Fidelity guy yesterday and asked about ETFs. He gave the same example about the monkey! Heech, you're not in Texas are you?

So what ETFs hold promise?

 

[heech]

Haha, really? I swear I just made up the monkey thing. Or maybe I'm like that Harvard undergrad, "internalizing" somethign I had read before.

As far as ETFs holding promise, you got me. I still say: stick with a broadly diversified index. The bulk of my money is either in S&P (if you're into the big companies that dominate the US economy), the Nasdaq index (if you believe in the future of technology), and the Russell 2000 (if you believe that smaller, more flexible US companies will be competitive/overperforming).

Just pick one of the above you're interested in and stop thinking about it too much. The fate of your money will be tied to the fate of the US economy as a whole. Likely to go up at a fair 9-10% rate the next few years, unlikely to make you rich enough to quit med school, unlikely to totally collapse.

 

[hunter1077]

Why not put it in one of those electronic savings accounts? You will earn 4.75% and you can withdraw anytime without penalty.

 

[Mikhail]

I guess it's you and me chatting it up on this forum tonight. 🙂

Mutual funds aren't a great choice, especially since you're saving it for a rainy day. There are expenses associated either with getting in or getting out of most funds. I wouldn't recomend a mutual fund unless you were going to hold it for a while, since that allows you to amortize these costs.

My take is, your best option might be an ETF (exchange-traded fund). These are easy to get in, easy to get out, but are still very broadly diversified. You can buy something like QQQQ for example, which is the largest 100 companies listed in the Nasdaq.

http://finance.yahoo.com/etf/browser/tv

I agree with you. I would've invested in Spider (S&P 500) if I had money. High liquidity, low maintenance fee.

 

[UserNameNeeded]

Hey, rg2000-- your list of mutual funds was really helpful. I'm thinking of buying into one of them!

Heech, ETFs seem kind of pricey. $20 a trade seems like the standard commission. They go down to half that if you do X number of trades, but that encourages you to trade more and sort of undermine the whole 'biggest bang for your buck' thing. What company do you use to trade your ETFs and how much do they charge?

I'm about to open an account with Fidelity. They have checkwriting, billpay, etc. options so it seems like they kind of cut down on the need for a bank. I wonder if I can have the school direct deposit money into my Fidelity account?

I agree with you. I would've invested in Spider (S&P 500) if I had money. High liquidity, low maintenance fee.

Why is the S&P 500 called Spider?

 

[almost_there]

But like any good prospectus will tell you, past performance does not predict future returns. Let me give you an example:

- I have 1000 monkeys.

- Each monkey makes one investment decision per year (maybe by throwing darts, maybe by flinging poo). Each investment decision has a 50% chance of being "above" market average, or 50% of being "below" market average. Pretty fair, right?

- These monkeys work for me for 10 years, flinging poo once a year.

- Just based on pure statistics alone, at least 1 of these monkeys will have picked the winner *every* year, for 10 years. 10 monkeys will have been right 9+ out of 10 years. 55 monkeys would've been right 8+ out of 10 years.

If you were to look at their Morningstar rating, these would be 5-star, and they'd look like absolute geniuses... 10 years of above-market performance? Sign me up!

That's not claiming all mutual fund managers are monkeys. But some clearly could be. The problem, from an investor point of view, is that it's nearly impossible to distinguish between one of my monkeys and a quality fund manager based on past performance.

Have you read "Fooled by Randomness", by Nassim Taleb? Great stuff, and an entertaining read, too. (though he does come off as fairly arrogant)

 

[heech]

I haven't read that book; sounds like something I should add to my shopping cart though.

UserNameNeeded: well, you're right, if you're doing a small transaction ($500-$1k range)... it'd actually be less expensive to pay the load on a mutual fund rather than buy an ETF. That said, there are numerous discount brokers online that can probably do better than $20. $9.95, $7.95... and probably some that give you free trades for setting up a new account. Go Google around.

The S&P 500 index originally traded as "Standard & Poor Depository Receipt", aka: SPDR.

 

[etf]

go with the fidelity international discovery fund, or if you've got $10k, go with the vanguard primecap core fund. you'll thank me later. etfs are great, but if you take a little more risk, you can have a lot greater reward...

 

[etf]

Hey, rg2000-- your list of mutual funds was really helpful. I'm thinking of buying into one of them!

Heech, ETFs seem kind of pricey. $20 a trade seems like the standard commission. They go down to half that if you do X number of trades, but that encourages you to trade more and sort of undermine the whole 'biggest bang for your buck' thing. What company do you use to trade your ETFs and how much do they charge?

I'm about to open an account with Fidelity. They have checkwriting, billpay, etc. options so it seems like they kind of cut down on the need for a bank. I wonder if I can have the school direct deposit money into my Fidelity account?



Why is the S&P 500 called Spider?

you've got a fidelity account - fantastic. to answer your question, yes you can have direct deposits into your account; you also get a debit card and even a fee-free american express gold card (value $75/year). fidelity is definately the way to go!

 

[UserNameNeeded]

...and even a fee-free american express gold card (value $75/year).

What does the $75 per year part mean? The cost of having the credit card? I'm so financially ignorant. 🙁

go with the fidelity international discovery fund, or if you've got $10k, go with the vanguard primecap core fund. you'll thank me later. etfs are great, but if you take a little more risk, you can have a lot greater reward...

I've heard about the Fidelity International Discovery Fund from several people. It's on my short list (I'm only going to buy 2-3 funds-- one of which has to be domestic, but I haven't seen any one raving about any domestic funds). What do you like about the Vanguard Primecap Core Fund?

Thanks for all the info/advice!

 

[etf]

What does the $75 per year part mean? The cost of having the credit card? I'm so financially ignorant. 🙁



I've heard about the Fidelity International Discovery Fund from several people. It's on my short list (I'm only going to buy 2-3 funds-- one of which has to be domestic, but I haven't seen any one raving about any domestic funds). What do you like about the Vanguard Primecap Core Fund?

Thanks for all the info/advice!

american express charges an annual fee for their charge cards, but with the fidelity account, you get a gold for free (or platinum for $320, which is $75 off). the catch? it works more as a delayed-debit card, meaning that it works exactly like a debit card, but instead of deducting the money the same day they wait till the end of the month, allowing you to earn interest/dividends on those funds. but it's what you'd be doing anyway, since charge card purchases are due in full every month anyway.

i have all of my domestic holdings in two funds: the fidelity contrafund, and the vanguard primecap fund. both are now closed to new investors, but the primecap core is basically the same as the primecap, so it's a way to get in...if you have 10 large to invest.

 

[etf]

Hey, rg2000-- your list of mutual funds was really helpful. I'm thinking of buying into one of them!

Heech, ETFs seem kind of pricey. $20 a trade seems like the standard commission. They go down to half that if you do X number of trades, but that encourages you to trade more and sort of undermine the whole 'biggest bang for your buck' thing. What company do you use to trade your ETFs and how much do they charge?

I'm about to open an account with Fidelity. They have checkwriting, billpay, etc. options so it seems like they kind of cut down on the need for a bank. I wonder if I can have the school direct deposit money into my Fidelity account?



Why is the S&P 500 called Spider?

and if you're going with etfs, do the vanguard ones (VIPERS - a cooler name too). VTI = vanguard total stock market index, much better than just S&P 500....

 

[UserNameNeeded]

About ETFs: if you don't mind me asking, how much do you buy/sell per transaction and how often do you buy/sell? I put in a limit order for one and the total came out to $1,500. Is that too small to make sense?

 

[etf]

buying an etf is like buying any other stock. you can buy 1 share, or 100,000,000 shares (although at 100M you'd be better buying a creation unit). so, depending on your broker, you'll pay whatever commission it is you pay to buy stock (at fidelity with a bronze level account, $19.95). i still think you're better off with mutual funds though...

 

[UserNameNeeded]

Yeah, I'm buying mutual funds + ETFs with anything I have left over.

What's a creation unit?

 

[etf]

lol, again, don't worry about creation units...

 

[UserNameNeeded]

Can anyone help me understand how certificate of deposits (CDs) work? If a 3 month CD has a 5% "annualized" return-- does that mean the actual rate of return is 1.25% at the end of the 3 months?

1.25% = 5% * 3/12

Otherwise, if you're actually getting a 5% gain at the end of 3 months and kept re-investing you'd have over 20% in returns for 1 year!!

 

[scotttennis]

Why is the S&P 500 called Spider?

Its ticker symbol on the American Stock Exchange is SPY. The term spider (or spyder) comes from the phrase S&P Depositary Receipts. Motley Fool article that explains it.

 

[scotttennis]

Can anyone help me understand how certificate of deposits (CDs) work? If a 3 month CD has a 5% "annualized" return-- does that mean the actual rate of return is 1.25% at the end of the 3 months?

1.25% = 5% * 3/12

Otherwise, if you're actually getting a 5% gain at the end of 3 months and kept re-investing you'd have over 20% in returns for 1 year!!

Yep, that's pretty much how it goes. Except, if the 5% is the APY (annual percentage yield), your actual 3-month return would be slightly lower because the APY is based on a full year of compounding.

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To answer the OP, I have and will be putting money into Schwab Equity Rated Funds and 3- to 6-month certificates of deposit. I've been very happy with the performance (and diversification) of the Schwab funds.

 

[UserNameNeeded]

Thanks for the feedback!

Scott, did you open an account with Schwab or are you just buying into the funds directly? If you have an account, why did you open it with Schwab rather than other brokers?

 

[etf]

broker-sponsored funds are generally the worst out there, because they charge steep management fees. but if schwab is giving you a decent return, it doesn't really matter, i guess. still, i tend to stick with fidelity and vanguard.

 

[scotttennis]

Thanks for the feedback!

Scott, did you open an account with Schwab or are you just buying into the funds directly? If you have an account, why did you open it with Schwab rather than other brokers?

I previously had a custodial account at Schwab under my parents. When I turned 21, I just tranferred the account to my own name. There are many good discount brokers out there, but I've been very happy with Schwab. One of the nice features is the ability to talk to a friendly local financial consultant for free. You also get a Schwab Bank checking account with unlimited ATM withdrawals and check writing. The sweep money market funds that the cash is automatically put into earn about 4.3%. Fidelity is a great broker as well. (If you sign up for Schwab tell them "scotttennis" sent you, and I'll get an extra commission free trade...no, just kidding.)

broker-sponsored funds are generally the worst out there, because they charge steep management fees. but if schwab is giving you a decent return, it doesn't really matter, i guess. still, i tend to stick with fidelity and vanguard.

I'm not sure about other brokers, but the Schwab funds that I'm talking about are no-load and no-fee, which means that there are no transaction fees when purchased through schwab.com or over the phone. Also, the expense ratios for the funds that I own range from 0.50 to 0.75...the dividends more than make up for this. Still, you can save a bit with exchange traded funds. And, I believe it was iShares, that had no capital gains distributions last year, which is good for taxes.

 

[etf]

I previously had a custodial account at Schwab under my parents. When I turned 21, I just tranferred the account to my own name. There are many good discount brokers out there, but I've been very happy with Schwab. One of the nice features is the ability to talk to a friendly local financial consultant for free. You also get a Schwab Bank checking account with unlimited ATM withdrawals and check writing. The sweep money market funds that the cash is automatically put into earn about 4.3%. Fidelity is a great broker as well. (If you sign up for Schwab tell them "scotttennis" sent you, and I'll get an extra commission free trade...no, just kidding.)



I'm not sure about other brokers, but the Schwab funds that I'm talking about are no-load and no-fee, which means that there are no transaction fees when purchased through schwab.com or over the phone. Also, the expense ratios for the funds that I own range from 0.50 to 0.75...the dividends more than make up for this. Still, you can save a bit with exchange traded funds. And, I believe it was iShares, that had no capital gains distributions last year, which is good for taxes.

all sounds legit. nice.