Index funds for beginners

[Austin Mize]

hello everyone first time posting in BiggerPockets, I was listening to the money podcast and Mindy and Scott where talking to a guest about low cost index funds in particular the S&p 500  and vanguard, I’m just cerious if I should set a money limit each month to spend on these two funds every month and how I should go apon doing this, any advice would Be much appreciated. Much love the BiggerPockets community!!!

[Michael Masters]

Originally posted by @Ernesto Hernandez:

Read jlcollinsnh.com

Then get a Vanguard account and go VTSAX. Call it a day. 

 Interesting you should recommend VTSAX, it's equivalent to the VTI fund I recommended and raises another question:  which is preferable an ETF or a mutual fund?  There are plusses and minuses with each.  Consider the following choices from Vanguard:

VTSAX - Total Stock Market Index - Mutual Fund Admiral Shares

VTSMX - Total Stock Market Index - Mutual Fund Investor Shares

VTI - Total Stock Market Index - Exchange Traded Fund

These are all the same exact product just sold to you in different ways.  In fact, if you go to the annual statement for any of these, it will lead you to the same exact document.  So which is best for you?  First let's see expenses and minimum investments:

Annual Expense Charge (as a % of invested funds)

VTSAX = 0.04%

VTSMX = 0.15%

VTI = 0.04%

Minimum Investment

VTSAX = $10,000

VTSMX = $3,000

VTI = 1 share = $137

Given this is the same exact product, I would never buy VTSMX because with its higher expense you are guaranteed to get a lower return (0.11%) than both VTI and VTSAX.  This higher expense can be seen in the 10-year return for each product:

10 Year Average Return

VTSAX = 8.72%

VTSMX = 8.60%

VTI = 8.72%

So now you have two to choose from, VTI and VTSAX.  If you don't have $10,000 minimum the choice is easy, only VTI is available.  Otherwise it comes down to whether you prefer mutual funds or exchange traded funds (ETFs). 

For me, I like ETFs because they can be sold instantaneously during market hours, this has the advantage of letting you know exactly how much you are paying or receiving for a trade.  In contrast, to buy/sell a mutual fund you must put the request in prior to market close and then the price is determined based on the market close price.  This means if you want to know approximately what you will pay/get you need to decide minutes before market close and hope pricing doesn't move too much.

The advantage of mutual funds is the quicker availability of funds.  If you sell an ETF on Monday you must wait until Wednesday to be able to access the money.  For mutual funds, the money from a Monday sale would be available on Tuesday.

Here's a good summary of the trading differences between ETFs and Mutual Funds:

https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs