Index Funds

Discussion in 'Business, Careers & Education' started by azoodica, Oct 20, 2012.

  1. azoodica

    azoodica Member

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    I've been reading up recently on Index Funds as a different way to invest my limited money, instead of letting it collect dust in a bank. I've read about a couple of the larger ones, Fidelity, Vanguard, S&P 500. I'm really just trying to wrap my head around exactly what the specifics of owning an Index Fund. I'm looking to invest a rather small amount (3,000 or so) and also not looking to park it for too long (1-2 years) How much do I get penalized or taxed for taking my gains out? What exactly is an expense ratio and how does it affect my initial costs for owning an Index Fund as well as what it will cost during the life of my investment in an Index Fund. Thanks a lot and if anything needs clarifying I will try to explain better.
     
  2. CYstyle

    CYstyle Senior member

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    Might as well go ETF. Free and no fees to worry about.

    SPY for the S&p
     
  3. Gordon Gekko

    Gordon Gekko Senior member

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    I concur with the previous poster. Look into ETFs. The good thing about ETFs is that you're not limited only to equities. There are ETFs also that bet on commodities and currencies.
     
  4. azif

    azif Senior member

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    A 2 year horizon isn't really recommended for investing in equities
     
  5. akatsuki

    akatsuki Senior member

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    Agreed - 2 year timeline is generally not good. You are pretty much timing the market at that range.
     
  6. austinite

    austinite Well-Known Member

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    I'm a 25 year old professional, I buy various index funds in $2-3k chunks for my retirement, "someday buy a house", and "someday start a business" savings. I like it better than trying to pick stocks for sure. I would never invest any money that you absolutely know you will need in the stock market, though.
     
  7. Concordia

    Concordia Senior member Dubiously Honored

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    If your short parking time is just before you go into an active mutual fund or a managed separate account, that is OK. If you're just loading up on equity risk with your down payment money then that is not a good idea.

    Expense ratios are just that: the percentage of your money each year that goes to support the manager. Broad-market equity index funds are usually around 0.1% or less, depending on the share class. ETFs are often a bit more expensive than open-ended funds, but that sort of information can be found on Vanguard.com or Bloomberg.com. By way of comparison, actively-managed mutual funds often carry expense ratios over 1%. So that's a fair hurdle the manager has to meet just to earn his fee.

    Gains are taxable in two ways. First is if the fund does any selling of stocks that have gone up. They have to calculate the total realized gain and divide it by the number of shares. You get your pro rata slice and pay taxes accordingly. You don't get this a lot with index funds, since they rarely sell from their portfolio unless they have a lot of redemptions.

    The second way is if you sell your shares yourself after they've gone up. Buy in at 53, sell at 57, and you get taxed on the $4 gain. As well as any dividends that get distributed while you own the thing. There is a 1099 report sent to you detailing all this after every 12/31.
     
    Last edited: Oct 31, 2012
  8. SkinnyGoomba

    SkinnyGoomba Senior member

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    [VIDEO][/VIDEO]I use them for Bonds along with actively managed funds for bonds as well, and interestingly the index fund has outperformed the actively managed fr the 2nd year in a row on an overall and also risk adjusted basis.

    I use one of them for stocks and it has underperformed my own stock portfolios, I have 10-15 different companies in them.

    They can be very helpful, especially with smaller amounts, since trading cost is a larger concern in those cases. I use them for my bond holdings because I am not interested in buying individual bonds.
     
    Last edited: Nov 5, 2012

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