Monday, June 5, 2006

Savvy investment in three easy steps

Here's how Travis decides how to invest the contents of his IRA:

1. Look at the list of Fidelity funds with no transaction fees.
2. Pick one basically at random.
3. Invest!

In all honesty, there was a step 0 in there: "Discover that buying the originally-randomly-chosen mutual fund would involve a $75 fee."


Anonymous said...

Given that these are managed funds, the goal of which is to let someone else manage the contents of your portfolio, I won't chide you too much for advertising to the world that you are too lazy (or stupid) to care what happens to your money.

But: good Lord man, at random!?! The fidelity web site has a short prospectus on line for each of their funds which detail the average growth rate over various time periods. You could have very least take some of the randomness out of it with that.

If you really don't care to take time when making financial decisions then I have some very nice property in Florida you should invest in.

Swid said...

Actually, both of you would be better off with investing in an exchange-traded fund. Modern financial theory holds that, in the long run, the best risk-return scenario is to own the *entire* market; ETFs offer a means to do so with virtually zero overhead cost.

With actively-managed mutual funds, it's one thing to see their gaudy past performance data and another thing entire to see that data less the fees and margins that are skimmed off the top.

Travis said...

Well, I looked at the table that listed the 1-, 3- 5-, and 10-year rates of returns for all of the funds I was considering. I picked one of the ones with a not-very-volatile-looking graph. That's what I called "basically random." I read through a few prospectuses back when I set up my 401(k), and decided I didn't care enough right now to continue doing so.

A significant portion of my 401(k) is in some ETF run by Vanguard, actually. It's quite conservative. I learned about those things from the JDE summer camp.

I'll care more about where all my money goes when I have more of it.

Travis said...

Hmmmm, perhaps an ETF and an index fund are not the same thing. They sound similar. Whatever...

Luke said...

The ETF is an exchange animal, so you are looking at the advantages of being able to short it, stop order it, etc. The rule of thumb is that as an exchange animal, the ETF has a bid-ask spread, so you have to have a bit lower expenses to make it worth buying over an equivalent mutual. The price you are paying is a bit more than its worth, just like any stock.

I bought some Vanguard VIPERS. Turns out, these are a separate class of ETF that does not benefit from another advantage of the ETF: the ability to get tax benefits through arbitrage.

I recommend a lot of research for the OCD-inclined. If you don't care about the dimes, I don't think it makes a bit of difference.

Anonymous said...

"If you don't care about the dimes, I don't think it makes a bit of difference."

That, my friends, ends this discussion.