Index fund vs. mutual fund for young(ish) children (bonds, mutual funds, cash)

[kickingprop]

Originally Posted by Big-Bucks

"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their [benchmark index funds]" -- Jim Cramer

It costs about $10 to place a buy order of any size so you will be paying a 5% commission on just a $200 purchase.

Not if she's buying a Vanguard fund or ETF and the account is with Vanguard. Then you pay no fees. Same is also true for TD Ameritrade with certain VG ETF's

[Isabella Tiger Moth]

Originally Posted by Big-Bucks

"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their [benchmark index funds]" -- Jim Cramer

It costs about $10 to place a buy order of any size so you will be paying a 5% commission on just a $200 purchase.

So, Big-Bucks your recommendation would be an index fund over a mutual fund? (Forgive me if I'm misreading your post.) Could you tell me why and which index fund you would recommend? Just trying to look at this from all angles.

[Petunia 100]

You can open a brokerage account with $100 at Schwab. Schwab has a long list of ETFs you can trade with no buy/sell trade fees. Included on that list is SCHB, a total market index ETF, with an expense ratio of .04%.

You can open a brokerage account with no minimum at all at Vanguard, but must have enough $ to purchase 1 share of the ETF you choose. You can trade any of Vanguard's ETFs with no buy/sell trade fees. The annual account fee is $20, but it is waived if you sign up for electronic delivery of all statements and other correspondence.

[ohio_peasant]

It's true that Vanguard lacks a neighborhood retail presence. This can be annoying, when for example markets decline, and one wishes to speak face-to-face with what amounts to a counselor. The benefit however is lower fees. Whether this really matters for small accounts is debatable. Indeed, for small accounts, the experience and the pedagogical value may matter more than minimization of fees. As the years roll on, and the account accumulates, considerations may change.

It sounds like the OP's main objective is to provide a teachable example for her children. This may be accomplished with actively-managed mutual funds, index-funds, or even individual stocks. There's really no superior choice, and it depends more on teaching-style than on the intrinsic merit of the thing. If however the objective were passive, long-term accumulation of money, I would unhesitatingly recommend Vanguard index funds.

[StealthRabbit]

Probably look to Fidelity or Schwab and see if either caters to low investment minimum for Minor Guardian or Custodial accts. (often it is $2500) each allows commission free trading on their products / ETF's (70 ETF's at Fidelity).
Can I Open a Brokerage Account for My Child?

You might need a discount brokerage to get a lower minimum, and then be limited to holdings (ETFs) (Schwab, Ameritrade, Scottrade...)

I would suggest the Equivalent ETF(s) to a Russell or S&P subset (not 500). You want good potential of sustainable growth over long haul. Total market CAN be too big / cumbersome / slow. but choose within your risk profile and objectives. As they grow accts, they can diversify. (very important). I would work like a dog to get accts to a $5k level ASAP, giving them more latitude for diversity and meaningful growth. Bake sales, garage sales, working for elderly, selling goods on eBay for friends, cleaning gutters, painting houses and fences, mowing grass, raking leaves, shoveling snow, pet-sitting and grooming, writing articles, photo journals, running errands, cooking, washing cars...

As soon as possible, get those kids on the payroll (earned income). You(They) REALLY want their assets in IRA (ROTH preferred) as FAFSA (college financial aid) will LOVE to have their funds in a standard acct & '100% available to spend on college'. ROTH is very nice, as all contributions (not earnings) are free to withdraw after 5 yrs, tho you want to avoid that... Just let it grow. I started my kids in ROTHs at age 12. I matched their wages 100% till age 18, they each had over $20k by then, but used ZERO for college. (Free FT college in WA State instead of HS helped them save 2 yrs of tuition costs). College loans are VERY cheap for students, parents / grands, can pay of AFTER graduation (if they desire). (with deflated Dollars)

Roth Custodial investments:
One child invested in Mutual (Vanguard VTSMX), the other child self managed by actively trading individual stocks. They each ended up about the same, BUT the active trader learned a LOT and is very good / works in that industry now (10 yrs after college). Both kids are far more disciplined investors than I. (they each took losses and learned from that).

I made it a point to take them to the brokerage at least once / yr for classes, counsel and they did lots of web / seminar courses (homeschooled, so they were fully in charge of their time, money, and learning opportunities (and time allotted for working)).

As kids get older, sit down on a Saturday and listen to radio (moneytalk / Brinker) annually read some investment books (Bogel / Wealthy Barber...). Take advantage of free sessions on IBD (26 Sept - 6 Oct),
Camp out at Bogelheads.

[Aredhel]

Originally Posted by Isabella Tiger Moth

So, Big-Bucks your recommendation would be an index fund over a mutual fund?

An index fund is any fund that tracks an index. Many mutual funds ARE index funds. (Some are not.) Many ETFs ARE index funds. (Some are not.)

Your question is like asking "Would you recommend a Cape Cod over a house?" A Cape Cod is a TYPE of house. All Cape Cods are houses, but not all houses are Cape Cods.

All index funds are either mutual funds or ETFs, but not all mutual funds or ETFs are index funds.

[Isabella Tiger Moth]

Originally Posted by Aredhel

An index fund is any fund that tracks an index. Many mutual funds ARE index funds. (Some are not.) Many ETFs ARE index funds. (Some are not.)

Your question is like asking "Would you recommend a Cape Cod over a house?" A Cape Cod is a TYPE of house. All Cape Cods are houses, but not all houses are Cape Cods.

All index funds are either mutual funds or ETFs, but not all mutual funds or ETFs are index funds.

Ohhhhh! Okay, this is good to know! Thank you!

[Isabella Tiger Moth]

Originally Posted by ohio_peasant

...If however the objective were passive, long-term accumulation of money, I would unhesitatingly recommend Vanguard index funds.

Okay, so, yes, this is the main objective. While I'm also interested in teaching them investing skills over the long haul, my main reason for starting this is to help them accumulate a cache of (hehe) cash for use in the very distant future. They're going into this with the understanding that this is a long-term investment. Hopefully, they'll be able to keep their hands off it long enough that it will actually meet the intended objective.

So...with that goal in mind...VTI?

Really, really appreciating all the help here--thank you guys so much! Please keep it coming because, quite honestly, I still feel like I have absolutely no idea what I'm doing.

[Big-Bucks]

Originally Posted by kickingprop

Not if she's buying a Vanguard fund or ETF and the account is with Vanguard. Then you pay no fees. Same is also true for TD Ameritrade with certain VG ETF's

But is that with the 0.3% annual account fee? Or are those ETF's just a little more expensive on the expense ratio side? I'm imagining the Sanford & Son episode where the room was free but the cookies the guy was eating were $20.

So, Big-Bucks your recommendation would be an index fund over a mutual fund? (Forgive me if I'm misreading your post.) Could you tell me why and which index fund you would recommend? Just trying to look at this from all angles.

Absolutely index funds. http://www.investingadvicewatchdog.c...ive-manage.jpg Index funds are passively managed mutual funds. Also sometimes called "exchange traded funds" or ETF's. I would pick a total stock market index fund (or S&P 500 index fund) and a total bond market index fund. And you could throw in an international stock market index fund if you like.
I have invested in SPY and VOO (a Vanguard offered fund), both S&P 500 index funds and BND and IEI. BND is a total bond market index fund offered by Vanguard. IEI is a 3 to 7 yr bond index fund. There's lots to choose from. If Schwab or Vanguard have in-house ones that trade for free then I'm sure they're good too.

[sholomar]

Ameritrade account has no minimum balance and has a selection of ETFs they don't charge commission fees on..

https://research.tdameritrade.com/gr...issionfree.asp


IVV would be the best one.. broad index fund with low expense ratio.