I’ve been putting off index investing all year. I’d made a bunch of reasons up about why it wasn’t the right time to start. They were all lies I told myself, just so that I could mask the intense fear I felt about doing something I had never done before. But, isn’t that always the reason we choose to not go after what we know we should, the fear of the unknown. Well the excuses stop now, because I finally did it and I am now the proud owner of index funds. *slow clap*
First, I want to talk about why I wanted to get into index investing. For me, it was all about diversifying our investment portfolio. My goal is to have an investment portfolio mixed with the following; pre-tax accounts , post-tax accounts, retirement accounts and non-retirement accounts. You generally can’t access retirement funds before the age of 59 ½ without paying a large fee while non-retirement post-tax investments can be accessed at any time. As you can see, a prudent investor will want to have a wide range of different investments for tax and accessibility reasons.
Let’s do a quick review of the types of investments that currently make up my portfolio:
Pre-tax Retirement Funds- Pre-tax retirement funds are savings vehicles that you invest your money in before the government can tax it. If you work for an employer, you more than likely have access to a company 401k, and if you’re really lucky, your company matches your contribution up to a certain amount. For example, my company will match 4% of my contribution. Meaning, as long as I contribute 4% of my income to my company 401k, my company will also invest 4% to my 401k, that’s basically free money and that’s what you call #winning.
Pre-tax retirement accounts are great because you get to save money on taxes (take that Uncle Sam!) but the money does get taxed when you access it in retirement. You will also pay hefty penalties on any money you withdraw before the age of 59 ½. The maximum amount you can invest into a 401K every year is $18,000 (your employer contributions do not count towards the limit). A majority of our money is “tied” up in pre-tax retirement funds.
Post-tax Retirement Funds- This is done through vehicles such Roth IRA’s and the maximum contribution is $5,500 a year. The money that goes into a Roth IRA has already been taxed, so when you access it in retirement, it’s tax free. Because of our income levels, we have to do Backdoor Roth IRA’s, which is essentially the same things as a Roth IRA. We just started funding Backdoor Roth IRA’s in 2015 for the 1st time, so not much of our portfolio is made up of it yet.
Post-tax Investment Funds- This is where you can invest your after tax money in things like the stock market. This money is already taxed and you only pay taxes on the earnings when you access it. There is no age requirement when you access it because it is not a retirement account. You can withdraw the funds in your post-tax investment funds whenever you want. And this is where VTSAX funds come into play.
So, Why VTSAX?
To be honest, I’m a busy full-time working mom who doesn’t have the time to sit around and research specific companies or stocks. I don’t want to do much work when it involves my investments. Call me the lazy average investor. It was after my time reading the JL Collins’ stock series (which I highly recommend) that I came to understand that there was an investment made specifically for someone like me. The VTSAX fund:
Here is a description of the fund taken from Vanguard’s website:
Created in 1992, Vanguard Total Stock Market Index Fund is designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks. The fund’s key attributes are its low costs, broad diversification, and the potential for tax efficiency. Investors looking for a low-cost way to gain broad exposure to the U.S. stock market who are willing to accept the volatility that comes with stock market investing may wish to consider this fund as either a core equity holding or your only domestic stock fund.
So as you can see, you are basically investing in the total stock market when you invest in a VTSAX fund. They also have different levels of investing. You can invest via Investor Share which require a $3,000 minimum investment or Admiral shares which require a $10,000 minimum investment. The expense fees on these mutual funds are extremely low (.05%), compared to trading individual stocks, this is something Vanguard is known for, minimal fees.
Don’t get scared off from this method of investing, if $10,000 and $3,000 are too steep for your pockets. I suggest you slowly save until you have enough to invest or consider investing in VTSAX EFT’s which have no minimum investment. VTSAX EFT’s purchased through Vanguard don’t charge an additional commission.
In the meantime, research different ways in which you can invest in similar types of products. Even if you don’t have the funds to invest after tax money to VTSAX now but are investing in your company 401k or Roth IRA’s, you can choose to invest those monies in VTSAX or VTSAX like funds for diversification. JL Collins talks more about that here.
So, now you see that I knew for a long time what I wanted to invest in, and I had the money to invest it but still I didn’t do it. Why?
Here is the dramatic conversation I was having with myself:
Me: What if there is a better option?
Self: Well, what if? There will always be a seemingly better option of something out there. But are you really going to take the time to research and find a better option when through all of your research thus far, you had found none. Besides, the returns you would make on investing in the VTSAX fund far exceed what you would make with the money just sitting in your savings account.
Me: What if we need the money for an emergency?
Self: That’s why you have an emergency fund…
Me: Ok, smart ass, what if the stock market crashes and we lose all of our money?
Self: Yes, the stock market may very well crash but it will bounce back as it always does. Besides, any money you invest now, you don’t need right now. The rule of thumb is to not invest any money you need for the short-term, say less than 10 years. Investing in the stock market is a long-term commitment, the longer you stay in it, the more returns you will see and the more you will be able to ride out the market dips. There will be ups and downs but eventually, the market always goes up.
All in all, I was just afraid. I knew every reason I told myself not to do it had a reasonable counter argument. I had done my proper research, ran all my investment calculators and this was the right move to make. So, I finally decided to go ahead and just do it. I decided to push through the fear I had and pull the trigger.
This essentially counts as the best Christmas gift we could give ourselves this year. The gift of index investing, portfolio diversification and the gift of pushing through fear to take smart risks.
“Courage is knowing what not to fear” – Plato
P.S.- I am not a financial advisor and I’m not getting paid by Vanguard to push VTSAX funds. I am simply stating what works for me. Please do your proper research and due diligence before investing.