The 3 action steps you would.....

[Tommy_Dolitte]

...advise a relative to take in opening a index fund brokerage account...

:

[unclemick]

1. Read Bogle
2. Buy Vanguard Target Retirement Series appropriate for your age and set up an auto deduct.from your checking.
3. Go fishing or whatever.

[ats5g]

1. Explain risks of stocks/make sure stocks are appropriate for person. Assuming this is a taxable account, determine relative tax efficiency of index funds choices. TSM & S&P 500 funds are very tax efficient. Note also the tax managed Int'l and Small Cap funds.

2. But directly from Vanguard (or at least very low cost brokerage account with no purchase fees). Explain any purchase and/or redemption fees, and how they can affect return and such. Ask about extra fees associated with any investment - "account maintenance fees", "admin fees", etc.

3. Explain how index funds work, and also Dunn's Law.

- Alec

[cute fuzzy bunny]

I have some family members helping me fix my wifes house and two cousins in their 20's broached it with me.

I started with the "risks" talk.

Then moved to "pay off your debt" as they both have 10-12k in consumer debt.

Then "stop spending money on dumb stuff" as one just bought his third dirt bike and one has been drooling over a hummer.

Moved on to compounding rates, current cost of an item against invested value (did you know that the $2 you spent on the egg mcmuffin you're eating would be worth $50 by the time you retire if you invested it?).

Then we had a brief talk about cheap index funds and asset allocation.

It's going to take them some time to get control over the debt and spending first. That might be more beneficial to them than starting an IRA right now.

[Tommy_Dolitte]

ats5g --

Interesting read. Has the law held up the past 5 years?

I and a cousin have few thousand dollars to spare and want to get into Index Funds.

[MikeK]

1. Call Vanguard and ask for some literature on asset allocation.
2. Decide on asset allocation.
3. Insure they have appropriate level of cash available as a "rainy-day fund". The worst thing they could do is withdraw this money at the wrong time.
4. Put your stock allocation in the Total Stock Market Fund.
5. Put your bond allocation in the Total Bond Market Fun.
6. Make regular investments into their (a) cash account, (b) total stock fund and (c) total bond fund.
7. Sit back, don't read the financial papers for six month.
8. Reallocate in six months if they allocation is off by 5% or more.

Mike

[unclemick]

Ten years ago - I gave my nephew(career Navy) - Bogle's 1994 book - "read this like a flight training manual". It worked - they are house hunting in greater San Diego right now (leaving Whidbey in Aug). TSP in Index 500 pushing 1/4 mil - wife is now civy with a good job.

My sister on the other hand - well some listen and some refuse to hear.

[ats5g]

Quote:

Has the law held up the past 5 years?

That's a good question. I don't have the mutual fund data that Bernstein has (have to pay Morningstar for this). But a quick perousal of M*'s website does indicate that DFA's Small Cap Value fund has destroyed most of the small cap value funds out there. It's much smaller and more valuey than most small value indexes and Vanguard's SCV fund.

I also wonder how many mutual funds have disappeared over the last five years. If I recall correctly, around 464 were liquidated and 870 funds were merged into other funds in 2003. I think around 100 have been liquidated thus far this year (2004), and around 130 have been merged into other funds. Talk about survivorship bias[see Problems with Manager Universe Data], which is extremely bad in small cap stock funds.

- Alec