Buying my first Index Fund

[TonyM]

Heres my current life situation:

• I am age 46, my wife is 55
• We both have well-paying jobs
• Zero Debt, paid off our home mortgage
• Our son is employed and has moved out of home
• We are financially conservative/cautious
• We have never owned shares/investments except for some stocks picked up in employee share schemes
• Otherwise our money is just in the bank (long term savings) and we both contribute to our retirement accounts.
• My wife retired two years ago, I'd like to retire in 5-8 years (or earlier)

Until now we've just been operating on very basic financial principles. Avoid debt, save more than we spend, don't take risks with money. Neither of us is interested in finance or investing, we find the whole subject stressful. So we just avoid the subject and try not to spend beyond our means.

For the first time in my life, I've looked into what is required for me to retire. I discovered FI, the 25-times formula, Index Funds etc. My wife is good with math and understands the whole thing, but is even more risk-averse than I am.

We are not far off from FI. So now we are more educated, I want to take our bank savings account and invest in an Index Fund. Index Funds sound perfect for us. We like that the risk is spread out over the whole market, and we don't want to pick stocks or care about stocks. We just want to "set-and-forget".

The only issue is that I hear stuff about how the stock market might be about to crash/go down. We understand that the idea is just to stay in for the long term. So once we put the money in we are quite happy to stay in and ride out any fluctuations. There's no risk that we will panic and try to sell.

My only issue is:

• Is now a smart time to sink all our savings into an index fund?
• Would it be better to wait for a dip in the market and THEN buy the index fund?
• But that kind of thinking is why our money has just sat in the bank earning very little interest. Am I just making another excuse to avoid committing our money?

My current job is stable and we can live off the income, so there's no pressure either way. Its just a question of getting bang-for-my-buck.

 

[RetireeRobert]

As to the timing issue, your crystal ball is as good as mine, or anyone else's for that matter.

1) So, one good rule to follow is to "dollar cost average". Do not commit all your funds at once. Avoid some of the "timing" issues that are inherent to a fluctuating vehicle, such as the stock market, by investing equal amounts of your principle once every month for some period of time---perhaps a three year period. In other words 36 equal dollar investments. If the market tanks in one year, then you get to even out the "high priced" purchases you made with lower priced purchases afterwards. You "average" your way in. Then, after your initial principle amount is fully invested, add any new savings you wish once a month in equal amounts.

2). An index fund is a very good and easy and automatic way to gain instant "diversification". I suggest you find an index fund with low expense ratio. Schwab, Fidelity, and Vanguard all have their own index funds. Look them up, compare the long-term records and expense ratios.

3). And "long term" investing takes care of a lot of mistakes. I believe you can find studies of stock market returns from "index" type vehicles over various rolling time periods. Historically, the longer the time period, the more certainty an index type fund produced a positive return and not a loss. Five years is better than one year, ten years is better than five years, twenty years is better than ten years.

Best wishes!

 

[TonyM]

1) So, one good rule to follow is to "dollar cost average". Do not commit all your funds at once. Avoid some of the "timing" issues that are inherent to a fluctuating vehicle, such as the stock market, by investing equal amounts of your principle once every month for some period of time---perhaps a three year period. In other words 36 equal dollar investments. If the market tanks in one year, then you get to even out the "high priced" purchases you made with lower priced purchases afterwards. You "average" your way in. Then, after your initial principle amount is fully invested, add any new savings you wish once a month in equal amounts.

As we've been learning and discussing this stuff over the past week, my wife made a suggestion very similar. "Put half in now and half in again in two years".

I told her that didn't sound very rational. We'd just be making the same mistake we've been making for the last 10 years, just with half our savings instead of all of it.

But when you put it like that it makes complete sense. Average out the cost of our stock. And if the stock market crashes on the day after our final contribution, then that's fine because our first year of investment has already been growing nicely for 2 years! Just keep putting money in when we can now the stock is cheap, and wait for the recovery.

Excuse me while I go tell my wife that I was wrong and she was right. Again.

 

[RetireeRobert]

Excuse me while I go tell my wife that I was wrong and she was right. Again.

Happy wife, happy life!

 

[Finance Dave]

I agree with Robert. You might consider rather than 1/2 now and 1/2 in two years, doing it more frequently with smaller amounts. Perhaps a certain $$ amount each month for 2 years? Or, put in a chunk now to get started...say 50%, then the rest each month slowly.

Make sure you select an index fund(s) that meet your goals. Some can be quite volatile, such as the Russell 2000 index has been lately. Or, maybe select a few index funds...this will spread your investments a bit more such as one for US and one for international etc. There is a measure called Beta that tells how a particular fund moves with the market...perhaps find one with a relatively low Beta if you are risk averse. A Beta of 1.0 means it moves pretty much lockstep with the market. Above 1.0 means it moves MORE than the market but in the same direction, and negative Beta means it moves OPPOSITE to the market.

Also, you may want to link up with an advisor. If you invest with one of the larger companies (we use Fidelity), you can get basic help from an advisor without paying fees for them to manage your account...so long as you don't need them to choose/manage your investments. In my view, an advisor is there to prevent you from making big mistakes...so consult with them before you make any big moves such as transferring an IRA, taking out large sums of money, determining whether to put money in a Roth or TIRA, and so on.

Good luck! You should be commended for your attitude, your thoughtful approach, your recognition of your risk tolerance, and your financial restraint to live below your means. You will do well!

 

[DrRoy]

You might consider rather than 1/2 now and 1/2 in two years, doing it more frequently with smaller amounts. Perhaps a certain $$ amount each month for 2 years? Or, put in a chunk now to get started...say 50%, then the rest each month slowly.

+1.

 

[bbqcoder]

Heres my current life situation:

[*]Otherwise our money is just in the bank (long term savings) and we both contribute to our retirement accounts.


The only issue is that I hear stuff about how the stock market might be about to crash/go down.

Are your retirement funds also in bonds and other fixed incomes? You should diversify some of them into index funds.

I suggest dollar cost averaging over a two year period.

It would be a good time to talk to your son about investing for retirement and to put most of his assets into index funds. My daughters are both still in school. I opened investment accounts for them using their savings about 2-3 years ago. The youngest is 17 and has $11K in index funds. $2K is from gains. Last year she got her first part time job and is putting 70% in her savings with the rest for her to spend as she wish.

I like to suggest a spread sheet to keep track of your assets and that you update it every year with the account value. Then you can see the trend that they are growing. It can help you spot underperforming assets and move them if necessary.

There will be another correction in the future that will significantly reduce the value of your portfolio. Stop looking at your account when it happens and continue to invest. It’s easier that way.

 

[RunningBum]

if the stock market crashes on the day after our final contribution, then that's fine because our first year of investment has already been growing nicely for 2 years!

That's the situation I warn could happen when you do dollar cost averaging. If you're ok with that, then it's for you.

I'm a lump sum investor myself. Get all of my money working in the market, and let the bond part of my asset allocation dampen the volatility. I mention this just because based on other posts you might think it's unanimous that DCA is the "right" way. It's one way, as lump sum is another. A third is value cost averaging. I'll let you look it up to see how it works, as I don't have it committed to memory. It's what I'd do if I didn't want to lump sum. But the choice is yours.

 

[Aerides]

Yup to DCA as above. Start something, now. The market will always go up and down but look at the performance of the S&P over the last 20 years - that's basically what you're getting with many index funds.

You will always hear the market is about to crash, or about to go on an epic bull. You will hear these things the same day from experts. You have to invest for the long haul and drown out the noise. There is never a good time, there is never a bad time. There is never a never or an always rule.

As for the funds you pick - please read up on a Bogle Lazy portfolio for good picks. While index funds are nice for set and forget, you want to make sure you have the good low fee offerings, from Vanguard, Fidelity, etc. VTSAX, FSKAX and the like.

 

[mrfeh]

The only issue is that I hear stuff about how the stock market might be about to crash/go down. We understand that the idea is just to stay in for the long term. So once we put the money in we are quite happy to stay in and ride out any fluctuations. There's no risk that we will panic and try to sell.

Don't make this assumption, especially since you have not invested before and have not seen the value of your assets drop.

My only issue is:

• Is now a smart time to sink all our savings into an index fund?
  
  Now is the time to choose an asset allocation and implement it.
  
  
• Would it be better to wait for a dip in the market and THEN buy the index fund?
  
  No.
  
  
• But that kind of thinking is why our money has just sat in the bank earning very little interest. Am I just making another excuse to avoid committing our money?
  
  Possibly.
  

My current job is stable and we can live off the income, so there's no pressure either way. Its just a question of getting bang-for-my-buck.

If you haven't read this already, start here:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

 

[qwerty3656]

You might consider rather than 1/2 now and 1/2 in two years, doing it more frequently with smaller amounts. Perhaps a certain $$ amount each month for 2 years?

+2

 

[mystang52]

Here's one additional, clarifying, suggestion to the fine recommendations already given. Standard mantra of retirement investing is setting an allocation percentage between stocks and bonds/cash. There are all sorts of formulas and recommendations. Determine what percentage of your total retirement funds you would be comfortable with in a stock mutual fund.
Then do the dollar-cost average thing with plan to get to that percentage over a set period of time. Then, don't watch it too much! It sounds like you'd be best with an S&P Index fund, or Total Stock fund.

 

[TonyM]

Thanks so much everyone. I'll check out this Bogle thing.

Are your retirement funds also in bonds and other fixed incomes? You should diversify some of them into index funds.

OK you're all going to laugh at my naivety, but here's the truth. My entire retirement find is just in the "Highest Growth" option. I don't even know what that means. I vaguely remember its stocks not bonds. In the first year I started working someone told me that was what I should do, because I (was) young and can accept the risk. I've never changed it.

They told me about this "matching" thing, where my employer matches my contribution. That seemed irresponsible to pass on, so I contributed enough to get max employer matching from my first year out of University. Later I started contributing more, because the accountant who did my tax return told me the contributions are pre-tax, blah blah whatever ok I'll increase my contribution and forget about it.

When I said that I'm conservative/cautious with my money, I should have said that I'm "conservative/cautious/clueless". My mum was a waitress, dad was a truck driver. I honestly know nothing about money except that you pay off debt as fast as you can and spend less than you earn. From the first day I started work I earned more than my parents ever did, my whole life I've felt rich, so I've never really had to care about money.

I'm very careful to compare prices when buying a washing machine, but I don't have a clue what my retirement fund is. To me, it's just a magic bucket of money. I put money in there because the accountant told me that's "sensible" and I guess that one day it will allow me to retire with more money than my parents, but that's all the thought I've ever given it.

Until this week I could not even tell you the order of magnitude of the money in my retirement fund. It just always seemed too remote, like monopoly money.

So even now, when you ask me "what are my retirement funds invested in" I realise I have no clue. The money in my savings account, I'm really careful with. Because that's my money and I don't want to lose it. In hindsight, my retirement fund has always been invested in the stock market, but I've been blissfully unaware because it never seemed real to me.

I've sleepwalked my way to near-FI. Now I just want to retire asap. It's like I've been climbing a mountain my whole life, now I suddenly realise where I am and that I'm scared of heights. I need to read a "Mountain Climbing for Beginners" manual. Thats why I'm here.

 

[mystang52]

.....

They told me about this "matching" thing, where my employer matches my contribution. That seemed irresponsible to pass on, so I contributed enough to get max employer matching from my first year out of University. Later I started contributing more, because the accountant who did my tax return told me the contributions are pre-tax, blah blah whatever ok I'll increase my contribution and forget about it.......

I honestly know nothing about money except that you pay off debt as fast as you can and spend less than you earn.
I've sleepwalked my way to near-FI. Now I just want to retire asap. It's like I've been climbing a mountain my whole life, now I suddenly realise where I am and that I'm scared of heights. I need to read a "Mountain Climbing for Beginners" manual. Thats why I'm here.

Without knowing your specific numbers, I suspect you're absolutely fine and in excellent financial shape. It only takes an online inquiry, or a phone call, to find out your 401K balance. The sentence I bolded is, in my opinion, 90% of retirement financial planning. As they say, "everything else is just details."

 

[racy]

...It would be a good time to talk to your son about investing for retirement and to put most of his assets into index funds....

+1
And, buy him a book or two on investing. https://tinyurl.com/zwlso6a
As the saying goes, "Time in the market beats timing the market".

 

[FIREHAPPY]

If I inherited a large sum of money which would be my primary source of income for retirement, I would not feel comfortable investing all of it in the market at one time.

I would set up an automatic monthly investment plan investing a % of the balance each month over a one year period or perhaps two. Sounds like you have a significant cash position which could provide a bit of diversification. You should also consider some bonds.

I started investing in index funds in my 20s and retired at 54 in 2016. I'm living proof that dollar cost averaging works!

Make sure to read up on index funds prior to investing paying particular attention to cap gains distributions and how they affects your tax situation. My financial advisor is keen on ETF index funds as a more efficient tax play as compared to standard mutual funds. Something to think about.

A standard, low cost, total market index fund or 500 index fund would suit your needs just fine too. They worked for me.

Good luck!

 

[OldShooter]

@TonyM, some comments:

First, congratulations. Like @mystang52, I think you're probably in excellent shape.

Regarding risk tolerance, you really won't know until you've lived through a few dips. But (and this is really important) volatility is not risk. If you look at the history of the market, every single dip has been followed by a recovery. Every single one. Some recoveries are faster than others, of course, so a wise strategy is to keep some "safe" money that you can use for as long as a few years after a dip. Real risk is buying a stock that goes way down and stays there. You can read about the "tech bubble" for examples; that foolishness filled a graveyard of companies.

Then there is the old wisdom: "Give a man a fish he eats for a day. Teach him to fish and he eats for a lifetime." You need to learn to fish/invest. You will get mostly good advice here but it tends to recommend particular fish rather than really teaching fishing. I strongly suggest that you table your list of questions for six months while you do some reading. My "new investor" list is as follows:

"If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download)

"The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

One thing you will learn is to beware of the word "index." Every good huckster in the industry has added the word "index" to his wares, typically offering sector funds at high expense ratios. What the consensus research recommends is "broad, low cost" index funds like Total US Market, S&P 500, Total International Market, etc. Don't step on any of the land mines scattered by the hucksters.

 

[JRon]

You are successful in the 2 most important things - avoiding debt and spending less than you make!

You are somewhat diversified between having your 401k growth stocks and your savings. You need to determine your Asset Allocation (AA) - meaning what percent of your retirement money you want in stocks and what percent you want in income (bonds, cash, etc).

As an EXAMPLE, a lot of retirees use a 70%/30% split with 70% being in stocks. A 60/40% split is more conservative and and 50/50% split is still more conservative. For EXAMPLE you could have one stock index fund for 60% of your retirement money, a bond index fund for 30%, and have the remaining 10% in cash (savings).

A little reading about the suggestions the people here have made and you will get it.

 

[TonyM]

Without knowing your specific numbers, I suspect you're absolutely fine and in excellent financial shape.

Just to be clear, I do know my actual numbers now. I was just saying that I had no clue about my numbers until last week. Then last week I started looking into what is required for me to retire.

So I started my first ever finance-related spreadsheet (at age 46!). I went through the last 8 years of financial records, worked out how much we'd been spending on average over the last 8 years, how much total income I'd been making. Then I added up all our Retirement Funds/Bank Account/Shares, and discovered that all that added up to almost 25x our annual spending. That's without trying to curb our spending, we remodelled the kitchen and went on overseas holidays, helped our son with a downpayment on his first apartment.

It was like if I went for a jog, and then someone told me I'd run fast enough to qualify for the Olympics. Just totally stunned. I've been so ignorant of my own finances.

It would be a good time to talk to your son about investing for retirement and to put most of his assets into index funds.

Its the other way around. My son is way more plugged in on this stuff than I am. Children, please talk to your parents about index funds.

 

[teetee]

You must be very frugal or has very high combined income because I don't see how one reaches FI with savings a lone at 45. Inflation alone can put you in a bad spot.

There is no good or bad time to start investing. Anytime is a good time as long as you keep investing money regularly into index fund. Pretend your investment is just another monthly or bi weekly expense and make it auto investment, and reinvest the dividend so you don't have to worry about any of it except complaining you do t know what it's about while throwing the annual statement into the trash.

 

[TonyM]

You must be very frugal or has very high combined income because I don't see how one reaches FI with savings a lone at 45. Inflation alone can put you in a bad spot.

It's not savings alone. Most of it is Retirement Funds (me and my wife), then Savings, then some individual shares (employee scheme).

Am I misunderstanding the FI formula? You include Retirement Funds in the calculation right?

My posts may be misleading because I talk about how I don't invest in the stock market, and only keep my money in the bank. But of course, I AM invested in the stock market via our retirement funds. It's not a deliberate mislead on my part, its just I've never understood how Retirement Funds work, so I wasn't aware that even though I thought I was "playing it safe" by keeping my savings in the bank, the larger portion of my total investment was actually Retirement Funds, going up and down wildly while I was blissfully unaware.

It's why my anxiousness about now buying my first Index Fund doesn't make logical sense. I've always been exposed to the Stock Market and just never paid attention because my Retirement Fund felt like some remote thing, while my bank account felt "real".

 

[lordjust]

It's not savings alone. Most of it is Retirement Funds (me and my wife), then Savings, then some individual shares (employee scheme).

Am I misunderstanding the FI formula? You include Retirement Funds in the calculation right?

My posts may be misleading because I talk about how I don't invest in the stock market, and only keep my money in the bank. But of course, I AM invested in the stock market via our retirement funds. It's not a deliberate mislead on my part, its just I've never understood how Retirement Funds work, so I wasn't aware that even though I thought I was "playing it safe" by keeping my savings in the bank, the larger portion of my total investment was actually Retirement Funds, going up and down wildly while I was blissfully unaware.

It's why my anxiousness about now buying my first Index Fund doesn't make logical sense. I've always been exposed to the Stock Market and just never paid attention because my Retirement Fund felt like some remote thing, while my bank account felt "real".

Tony,

Read some of the links that folks posted for you. Schedule a call with a Fidelity Rep as Finance Dave stated. After you get some more information from those sources then come back for specific advice. There are a lot of choices you can make that are correct but the best plan will all depend on you. The folks here give excellent advice but again, there are different options. I have a feeling you will have a solid plan laid out to drop here and receive suggestions after your research.

Welcome to the group

 

[TheWizard]

Tony should take a month off, so to speak, and learn about low-cost index fund investing both here and at that other website.
.
To a degree, ignorance is bliss in stock market investing since it sounds like he just left his employer plan funds alone through good and especially through bad.

Trying to take charge of things too quickly could backfire; I'd be a bit afraid of that.

For starters, what exactly do you have in that employer tax-deferred plan?

 

[Brat]

If you are interested in a balanced fund buy Vanguard's Wellington or Wellesley from a Vanguard account. Alternately a Total Stock Market ETF is a great choice now and for the long term. The market is rotating from growth and technology to industrials and value, with a Total Stock Market ETF you won't be caught crosswise. The only technology investment I have is a semiconductor ETF, chips are in short supply and I have no clue who holds the hot hand.

 

[TheWizard]

Balanced funds aren't a good idea in a taxable account, sorry...