Articles in this series:
- How to start investing for busy professionals – The Basics
- Beginning investments for busy professionals – How much can you make?
So now you’ve decided not to let your earnings erode to inflation in your savings account earning 0.05% interest, taxed at your doctor’s marginal income rate.
Congratulations. The first step in putting your money to work in the stock market is to choose an account custodian, or brokerage firm to invest with. It is important to remember that your stock market investments aren’t protected by FDIC—this means that if your investments go under, you lose it all. Before you get cold feet suddenly and opt to stash your money under your mattress, it is important to realize that index fund investing is broadly diversified across thousands of companies in different industries. A permanent crash in these investments likely would reflect more serious issues in the world that would impact any investment.
In other words, if your index fund crashes permanently, you might be better off in a silo with a supply of powdered food and some shotgun shells.
The skinny on investment custodians
Frankly if you are moderately computer literate, it probably doesn’t matter much which company you decide to open up your investments in.
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Common options include Vanguard, Fidelity, Schwab, Merrill, and E*Trade. Most recently, E*Trade was purchased by Morgan Stanley, but there appears to be no plans to change how E*Trade functions. There are plenty of other ones out there, but these are the big names in the industry. There are nuances with every one of these custodians, and I don’t have any huge grievances about any of these. I would rate the customer service and web interfaces on all of these companies to be very similar except for Merrill’s—their website functionality is atrocious. I went through about 4 months of headaches until all of my transactions became automated. I will discuss my experience with Merrill in a future article.
All of the companies have low expense, broadly diversified funds. That is all that you will need as a passive investor. If your current or past employer offered 401k investment options at any of these custodians, it might be easier to open an investment account at the same firm for simplicity.
The steps to getting established are quite simple, just like opening a bank account online:
- Choose a custodian and open the account.
- Link your checking or savings account to the investment account. This will likely take a few days to verify.
- Choose which funds to invest.
There are different modes of thought on which companies to invest in, and how to diversify your investments. Pundits have written many books on the subject, and there are hundreds of thousands of pages of financial forum arguments on what is the ideal distribution of funds.
Fortunately for the beginning investor who is aiming not to lose out with the minimal amount of upkeep, the homework as already been done for us. As you become more experienced and develop more interest, you can slowly branch out.
The basic option of investment fund to choose, is to invest in the entire stock market. You’re sort of betting on the world in this. There is nothing wrong with that, and a complete collapse of the world economy would mean that there are probably more pressing issues to contend with than your stock portfolio.
Here are the “mostly” equivalent world index funds managed by their respective firms:
- Vanguard – VTSAX (minimum investment of $3000)
- Fidelity – FSKAX or FZROX
- Schwab – SWTSX
- Merrill – POMIX (This tracks the S&P total market rather than the total stock market, but it’s somewhat similar, for the beginning investor)
These are all mutual funds. For practical purposes to get started investing, you’d essentially choose a dollar amount of mutual fund to purchase. For instance, if you had an account in Schwab you can choose to buy “$1000 worth of SWTSX”. This would take approximately one day to process, and the price of the each share is “automatically” calculated from the value of the fund’s assets from the prior day.
This is different from purchasing a stock, where you name the price that you’d want to purchase. Technically, there are also options to purchase these mutual fund types in equivalent exchange traded funds (ETFs) like stocks, but that is a topic for another discussion.
That’s it for now! This is enough information to get started with some basic index fund investing.
What funds did you purchase as your first investment opportunity?