Comments on: The Four Pillars on Index Funds http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/ personal finance that makes cents Fri, 21 Nov 2008 14:59:32 +0000 http://wordpress.org/?v=2.5.1 By: Troy Smith http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-148073 Troy Smith Sun, 14 Sep 2008 20:32:01 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-148073 Can you see all you people not to invest, the only thing the people want is your freakin money. so keep your money in the bank Can you see all you people not to invest, the only thing the people want is your freakin money. so keep your money in the bank

]]> By: Ron http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-142082 Ron Mon, 28 Jul 2008 07:55:57 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-142082 Hi All Can anybody help me about two years ago I invested about three thousand pounds I had in a bank account into a sipp ,I then bought two funds one cost £1700 the other I invested about £700 and bought shares with the rest of the money my shares have all depreciated lost mony as well as the funds obviously I would like to make as much money as I can ? many thanks Ron Hi All
Can anybody help me about two years ago I invested about three thousand pounds I had in a bank account into a sipp ,I then bought two funds one cost £1700 the other I invested about £700 and bought shares with the rest of the money my shares have all depreciated lost mony as well as the funds obviously I would like to make as much money as I can ?
many thanks
Ron

]]> By: Paul Williams http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139580 Paul Williams Thu, 10 Jul 2008 13:21:25 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139580 @joejoeice: You're welcome. It does get difficult to wade through all of the options out there, but that's what the investment industry wants...confusion! It's easier to make money off of you if you are confused. Just look at the VUL and Annuity industries. ;) (Don't get me started on them...I'll pop a vein in my forehead!) @Gerard: I'm not sure about Australia either, but I've never heard of a bid-ask spread when buying directly from Vanguard in the US. You're buying at the Net Asset Value (NAV), which is what each share is actually worth based on the end of day values for the portfolio holdings. This is why you can't trade in and out of mutual funds throughout the day - they have to update every holding in their portfolio to get the NAV. I suppose that would be quite an administrative hassle (or at least it used to be before computers were so cheap). I should note this does not apply to closed-end funds. Vanguard does have some closed funds that you can only purchase from current investors and not from the company directly. In that case, you will be running into bid-ask spreads and a possible premium over the NAV. @joejoeice:

You’re welcome. It does get difficult to wade through all of the options out there, but that’s what the investment industry wants…confusion! It’s easier to make money off of you if you are confused. Just look at the VUL and Annuity industries. ;) (Don’t get me started on them…I’ll pop a vein in my forehead!)

@Gerard:

I’m not sure about Australia either, but I’ve never heard of a bid-ask spread when buying directly from Vanguard in the US. You’re buying at the Net Asset Value (NAV), which is what each share is actually worth based on the end of day values for the portfolio holdings. This is why you can’t trade in and out of mutual funds throughout the day - they have to update every holding in their portfolio to get the NAV. I suppose that would be quite an administrative hassle (or at least it used to be before computers were so cheap).

I should note this does not apply to closed-end funds. Vanguard does have some closed funds that you can only purchase from current investors and not from the company directly. In that case, you will be running into bid-ask spreads and a possible premium over the NAV.

]]> By: Gerard http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139481 Gerard Wed, 09 Jul 2008 23:19:51 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139481 @ Paul Not sure about the US but for Vanguard Australia you still pay a bid-ask spread even if you do go through the company directly. Definetely agree that going through the company is, in most cases, better than ETFs though @ Paul
Not sure about the US but for Vanguard Australia you still pay a bid-ask spread even if you do go through the company directly. Definetely agree that going through the company is, in most cases, better than ETFs though

]]> By: joejoeice http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139467 joejoeice Wed, 09 Jul 2008 22:11:06 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139467 @ Paul Thanks for the advice. I knew there was a point where the best course shifted from ETFs to Vanguard, I just thought it was closer to something a regular small investor may face. In my post, I had in mind someone who puts in the money for retirement (which I think is what JD is doing through sharebuilder). In that case, I can't see how a fee on both the buy and sell event could be more than the total of the even low yearly fees of Vangard. But, there are so many variables that I am just guessing. The whole complication illustrates the difficult nature of fees. We are told to be careful of them, but doing so is really complicated. What I like about this blog is that people are hearing that fees do matter. Even what looks like a small fee makes a drastic hit over the long term. @ Paul
Thanks for the advice. I knew there was a point where the best course shifted from ETFs to Vanguard, I just thought it was closer to something a regular small investor may face. In my post, I had in mind someone who puts in the money for retirement (which I think is what JD is doing through sharebuilder). In that case, I can’t see how a fee on both the buy and sell event could be more than the total of the even low yearly fees of Vangard. But, there are so many variables that I am just guessing. The whole complication illustrates the difficult nature of fees. We are told to be careful of them, but doing so is really complicated. What I like about this blog is that people are hearing that fees do matter. Even what looks like a small fee makes a drastic hit over the long term.

]]> By: Paul Williams http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139440 Paul Williams Wed, 09 Jul 2008 18:35:05 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139440 @joejoeice: The problem with saving to invest in larger chunks is the risk on missing the best days in the market. There are tons of statistics about what happens to your return if you miss the best 10 days of the market in a year...you lose a lot of the return for that year. Thus, it's better to invest the money as soon as you can. If you have small amounts, then it's by far better to go straight to Vanguard. You can do as little as $50/month under an automatic investment plan. Second, your strategy still does not avoid the Premium over NAV and the Bid-Ask Spread. These two costs tend to function as a percent of the trading price depending on the volume and market sentiment surrounding the ETF. Since these costs are not fixed like commissions it will still take you 4 years or so to recoup the cost through your expense ratio savings. (And that's only if you do not buy or sell any more of that ETF during the time period.) The only time I'd actually recommend going into an ETF instead of a mutual fund directly at Vanguard is in the case of a large windfall that absolutely will not be touched for a long time (>10 years). In this situation, the ETF would have a clear advantage over the mutual fund. Other than that (which is most of the time), we should all stick with mutual funds held directly at the fund company. I advocate this because you'll easily see Vanguard comes out on top for index funds in nearly all asset classes. (I just wish they had a global bonds fund!) Therefore, it's easy to keep everything at Vanguard while avoiding commissions, Premiums over NAV, and Bid-Ask spreads while keeping expense ratios low. I am not affiliated with Vanguard in any way. I am just a financial planner tired of seeing people getting ripped off! :) @joejoeice:

The problem with saving to invest in larger chunks is the risk on missing the best days in the market. There are tons of statistics about what happens to your return if you miss the best 10 days of the market in a year…you lose a lot of the return for that year. Thus, it’s better to invest the money as soon as you can. If you have small amounts, then it’s by far better to go straight to Vanguard. You can do as little as $50/month under an automatic investment plan.

Second, your strategy still does not avoid the Premium over NAV and the Bid-Ask Spread. These two costs tend to function as a percent of the trading price depending on the volume and market sentiment surrounding the ETF. Since these costs are not fixed like commissions it will still take you 4 years or so to recoup the cost through your expense ratio savings. (And that’s only if you do not buy or sell any more of that ETF during the time period.)

The only time I’d actually recommend going into an ETF instead of a mutual fund directly at Vanguard is in the case of a large windfall that absolutely will not be touched for a long time (>10 years). In this situation, the ETF would have a clear advantage over the mutual fund.

Other than that (which is most of the time), we should all stick with mutual funds held directly at the fund company. I advocate this because you’ll easily see Vanguard comes out on top for index funds in nearly all asset classes. (I just wish they had a global bonds fund!) Therefore, it’s easy to keep everything at Vanguard while avoiding commissions, Premiums over NAV, and Bid-Ask spreads while keeping expense ratios low.

I am not affiliated with Vanguard in any way. I am just a financial planner tired of seeing people getting ripped off! :)

]]> By: Dustin Brown http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139405 Dustin Brown Wed, 09 Jul 2008 14:58:04 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139405 @Dough Roller: Thanks for the suggestion, but my employer makes contributions to the American Funds account, so I'm not going to give that up. @Dough Roller: Thanks for the suggestion, but my employer makes contributions to the American Funds account, so I’m not going to give that up.

]]> By: joejoeice http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139404 joejoeice Wed, 09 Jul 2008 14:54:23 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139404 Buying ETFs through sharebuilder becomes difficult for small investors. There is a $4 commission for each buying transaction. This $4 is the same if you are buying 1 or 1000 shares. So, when you buy more shares, that $4 cost is being spread out over more total shares, making the cost per share less. For example, if you only bought one share, that ETF would have to go up $4 before you even broke even. However, if you bought 10 shares, the ETF would only have to go up .40 for you to break even. One method to minimize the cost per share would be to let your monthly investments build up in a high interest savings account. Then, four times a year (or 2 or 1) you take that money and buy ETFs. This would help your returns because you would be lowering your costs (which subtract from the returns). However, in some cases, this method is foiled by the fact that as your money was building up in a savings account, the market was going up. Depending on how many shares you are buying and how the market is changing, different methods would produce the best results. Since the market's performance is an unknown, you can't really anticipate what method "win". I still think that most cases would encourage building up some money to buy bigger amounts of shares. Buying ETFs through sharebuilder becomes difficult for small investors. There is a $4 commission for each buying transaction. This $4 is the same if you are buying 1 or 1000 shares. So, when you buy more shares, that $4 cost is being spread out over more total shares, making the cost per share less. For example, if you only bought one share, that ETF would have to go up $4 before you even broke even. However, if you bought 10 shares, the ETF would only have to go up .40 for you to break even. One method to minimize the cost per share would be to let your monthly investments build up in a high interest savings account. Then, four times a year (or 2 or 1) you take that money and buy ETFs. This would help your returns because you would be lowering your costs (which subtract from the returns). However, in some cases, this method is foiled by the fact that as your money was building up in a savings account, the market was going up. Depending on how many shares you are buying and how the market is changing, different methods would produce the best results. Since the market’s performance is an unknown, you can’t really anticipate what method “win”. I still think that most cases would encourage building up some money to buy bigger amounts of shares.

]]> By: Paul Williams http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139383 Paul Williams Wed, 09 Jul 2008 13:36:10 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139383 While ETFs have lower expense ratios, I have found that the other costs involved often make it a poor decision to use them instead of mutual funds held directly at a mutual fund company (like Vanguard). For example, you'll have the following costs with an ETF that you won't have with a mutual fund held directly at Vanguard: Premium over NAV (Net Asset Value) Bid-Ask Spread Commission (negligible) While the expense ratios can be quite a bit lower, there is not a huge difference between Vanguard's mutual funds and ETFs. The ETF costs I listed above can easily end up at 1% or more of your investment depending on what is happening in the market when you invest. I've estimated it will take 4-5 years to recoup the ETF costs if you're making a one-time switch from mutual funds (if you do not sell during that time period). You will almost never catch up if you are making periodic contributions because you'll run into the ETF costs every time you invest. This is especially true with smaller investment amounts. So to sum it up: You should generally stick to mutual funds held directly at the fund company (and the best choice by far for index funds is Vanguard). While ETFs have lower expense ratios, I have found that the other costs involved often make it a poor decision to use them instead of mutual funds held directly at a mutual fund company (like Vanguard).

For example, you’ll have the following costs with an ETF that you won’t have with a mutual fund held directly at Vanguard:

Premium over NAV (Net Asset Value)
Bid-Ask Spread
Commission (negligible)

While the expense ratios can be quite a bit lower, there is not a huge difference between Vanguard’s mutual funds and ETFs. The ETF costs I listed above can easily end up at 1% or more of your investment depending on what is happening in the market when you invest.

I’ve estimated it will take 4-5 years to recoup the ETF costs if you’re making a one-time switch from mutual funds (if you do not sell during that time period). You will almost never catch up if you are making periodic contributions because you’ll run into the ETF costs every time you invest. This is especially true with smaller investment amounts.

So to sum it up: You should generally stick to mutual funds held directly at the fund company (and the best choice by far for index funds is Vanguard).

]]> By: MillionDollarJourney http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139365 MillionDollarJourney Wed, 09 Jul 2008 11:24:20 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139365 J.D, once your index account gets large enough, you may want to consider converting from index mutual funds to index based ETF's as the MER's are lower. Along with their index mutual fund products, Vanguard also offers relatively cheap ETF's. J.D, once your index account gets large enough, you may want to consider converting from index mutual funds to index based ETF’s as the MER’s are lower. Along with their index mutual fund products, Vanguard also offers relatively cheap ETF’s.

]]> By: Rob D http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139360 Rob D Wed, 09 Jul 2008 10:49:46 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139360 I've been a big fan of Four Pillars for many years. The only challenge is picking what you're asset allocation should be. I’ve been a big fan of Four Pillars for many years. The only challenge is picking what you’re asset allocation should be.

]]> By: So Cal Savvy http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139349 So Cal Savvy Wed, 09 Jul 2008 05:33:05 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139349 I've been an index investor for most of my (short) investment history and I love it! I look forward to reading this book myself. Thanks for bringing it to my attention! I’ve been an index investor for most of my (short) investment history and I love it! I look forward to reading this book myself. Thanks for bringing it to my attention!

]]> By: Aaron Stroud http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139348 Aaron Stroud Wed, 09 Jul 2008 05:20:55 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139348 William Bernstein is a brilliant historian, investor, and <strong>brain surgeon</strong> to boot! (Not to be confused with Peter L. Bernstein, also a brilliant author and financial historian.) William's <em>Four Pillars</em> is a classic. @ Brian, Vanguard's <a href="https://personal.vanguard.com/us/content/Funds/FundsVanguardFundsTargetOverviewJSP.jsp" rel="nofollow">Target Retirement Funds</a> would be a great place for you to start investing. Vanguard's Target Retirement funds pool several stock and bond indexes to give you a balanced portfolio. As you get closer to retiring, the percentage of bonds rises as stock index funds are sold, lowering your risk to stock market volatility. Many mutual fund companies offer a similar product, but Vanguard is my favorite because they have the lowest fees around. William Bernstein is a brilliant historian, investor, and brain surgeon to boot! (Not to be confused with Peter L. Bernstein, also a brilliant author and financial historian.) William’s Four Pillars is a classic.

@ Brian, Vanguard’s Target Retirement Funds would be a great place for you to start investing. Vanguard’s Target Retirement funds pool several stock and bond indexes to give you a balanced portfolio.

As you get closer to retiring, the percentage of bonds rises as stock index funds are sold, lowering your risk to stock market volatility. Many mutual fund companies offer a similar product, but Vanguard is my favorite because they have the lowest fees around.

]]> By: Gerard http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139338 Gerard Wed, 09 Jul 2008 02:11:07 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139338 While I absolutely subscribe to index investing, I still believe there is a place for active investing if you have the time and energy to "invest". I keep a small portion of my portfolio in stocks that I pick in the hopes that one of them turns out to be the next Microsoft or Berkshire Hathaway! While I absolutely subscribe to index investing, I still believe there is a place for active investing if you have the time and energy to “invest”. I keep a small portion of my portfolio in stocks that I pick in the hopes that one of them turns out to be the next Microsoft or Berkshire Hathaway!

]]> By: Dough Roller http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139334 Dough Roller Wed, 09 Jul 2008 01:39:12 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139334 @Dustin Brown: You should be able to move your IRA to a different broker. For example, you could open an IRA through Vanguard of Fidelity and have access to all of their low cost funds. @Brian: Mutual fund companies like Vanguard, Fidelity and T. Rowe Price offer index and other mutual funds. You can buy shares in these funds directly from them with no purchase fees and low expense ratios. You can also purchase their index funds through accounts set up with online brokers such as Sharebuilder or Zecco. If you want funds from a single company like Vanguard, however, it's cheaper to buy directly from the fund company. @Dustin Brown: You should be able to move your IRA to a different broker. For example, you could open an IRA through Vanguard of Fidelity and have access to all of their low cost funds.

@Brian: Mutual fund companies like Vanguard, Fidelity and T. Rowe Price offer index and other mutual funds. You can buy shares in these funds directly from them with no purchase fees and low expense ratios. You can also purchase their index funds through accounts set up with online brokers such as Sharebuilder or Zecco. If you want funds from a single company like Vanguard, however, it’s cheaper to buy directly from the fund company.

]]> By: Mo Money http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139329 Mo Money Tue, 08 Jul 2008 23:21:38 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139329 The largest and cheapest companies that offer index are Vangard and Fidelity. The largest and cheapest companies that offer index are Vangard and Fidelity.

]]> By: Brian http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139325 Brian Tue, 08 Jul 2008 21:59:47 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139325 I just wanted to know, when talking about index funds, do you always have to go thru a company? Are they the ones that make index funds in the first place? Thanks, I'm kind of new at this. I just wanted to know, when talking about index funds, do you always have to go thru a company? Are they the ones that make index funds in the first place? Thanks, I’m kind of new at this.

]]> By: Dustin Brown http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139323 Dustin Brown Tue, 08 Jul 2008 21:36:43 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139323 Awesome timing, JD. I happen to be doing some reading in this department right now as well. The Fool has a great article on the subject: http://www.fool.com/School/MutualFunds/Basics/Intro.htm My question at this point is what to do about my Simple IRA. My broker only offers actively managed funds with associated costs that don't give me a warm and fuzzy feeling. I feel kind of stuck. Awesome timing, JD. I happen to be doing some reading in this department right now as well. The Fool has a great article on the subject: http://www.fool.com/School/MutualFunds/Basics/Intro.htm

My question at this point is what to do about my Simple IRA. My broker only offers actively managed funds with associated costs that don’t give me a warm and fuzzy feeling. I feel kind of stuck.

]]> By: Eden http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139321 Eden Tue, 08 Jul 2008 21:03:50 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139321 Concentrating on a small number of stocks certainly isn't wise for the average investor, but it certainly was wise for someone like Warren Buffett. It really comes down to how smart you are and how much time you have to spend on your investing. If you can only do it part time, index funds would definitely be a wise place to put your money. Concentrating on a small number of stocks certainly isn’t wise for the average investor, but it certainly was wise for someone like Warren Buffett.

It really comes down to how smart you are and how much time you have to spend on your investing. If you can only do it part time, index funds would definitely be a wise place to put your money.

]]> By: Paul Williams http://www.getrichslowly.org/blog/2008/07/08/the-four-pillars-on-index-funds/#comment-139320 Paul Williams Tue, 08 Jul 2008 21:01:03 +0000 http://www.getrichslowly.org/blog/?p=1848#comment-139320 Glad to hear you've come to the dark side, JD...the side no one in the investment industry wants you to know about! (Or at least will try to argue you out of...their paycheck depends on it!) Glad to hear you’ve come to the dark side, JD…the side no one in the investment industry wants you to know about! (Or at least will try to argue you out of…their paycheck depends on it!)

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