The Military Wallet» Investing

Best Investment Options for Deployed Military Members

Ryan — Fri, 13 Aug 2010 10:32:44 +0000

One of the biggest benefits to going on a deployment is the extra income. Tax free pay, hazard pay, imminent danger pay, family separation pay, and other financial benefits abound. Of course, they don’t make up for the danger of being in a hostile environment or being separated from your family, but the dollars are real and you should use them wisely while you are receiving those benefits.

I highly recommend saving money while deployed, but if you are already doing well in that department, then it is time to start investing your money for growth. The Thrift Savings Plan and military retirement pay are both great benefits, but not everyone reaches the service requirements to earn the military pension and the TSP may not be enough. Here are some places to start investing while you are deployed.

Best investment options for deployed military members

Open a Roth IRA

Roth IRAs are among the best investment options available to military and civilian members alike. Roth IRAs are retirement accounts with a great tax advantage – you make contributions with income that has already been taxed, and you are able to make tax free withdrawals in retirement. But, being deployed has it’s advantages – your income is already tax free, meaning you don’t pay taxes on your contributions or withdrawals! Once upon a time this prohibited you from making Roth IRA contributions, but the Heroes Earned Retirement Opportunities (HERO) Act was enacted several years ago to allow military members to open IRAs even if 100% of their income was non-taxable due to deployments. Looking to get started? Here are some of the best Roth IRA companies.

Benefit of Roth IRA contributions in a tax free zone: Tax free contributions with tax free withdrawals.

Contribute to your Thrift Savings Plan

The Thrift Savings Plan is a great benefit available to military members. It functions the same way as a traditional 401k plan: you take pre-tax dollars and invest them without the drag of taxes until you make a qualified withdrawal in retirement years. This is the opposite of a Roth IRA, you don’t pay taxes now, but pay taxes later.

But there is a big difference if yo invest in the TSP while deployed. Your contributions are already tax free, but since your income is tax exempt, you will not pay taxes on the contributions made while in a tax free zone. This in effect gives you some tax benefits similar to a Roth IRA. Your withdrawals in retirement will be less flexible than a Roth IRA, however, and you will still be required to make minimm withdrawals when you reach the required age. Your taxable and tax free withdrawals will be made in proportion to the contribution amount, meaning you can’t determine how and when you withdraw the tax free funds (keep in mind these rules are subject to change in the future).

Benefit of TSP contributions in a tax free zone: Tax free contributions with tax free withdrawals.

Participate in the Military Savings Deposit Program (SDP)

The Savings Deposit Program (SDP) is a military investment benefit available only to those currently serving in a designated combat zone. It offers a guaranteed return of 10% interest for deposits up to $10,000. You can start it as soon as you are in country for 30 days and you can continue earning 10% interest for up to 90 days after you return home from the combat zone. There are some limitations and inconveniences with the SDP (you can only contribute the amount of your paycheck each month until you reach $10k and you can only leave it in there 90 days after you redeploy), but it is probably the only place in the world right now where you can earn a guaranteed 10% return on investment. See your finance department for more information.

Benefit of Savings Deposit Program: Guaranteed 10% interest on deposits.

Self-Directed Investments

If you are more concerned with short term investing and having access to your investments in the near future, then you probably want to avoid investing with a Roth IRA or the Thrift Savings Plan because both are retirement accounts which limits availability to your contributions. The Savings Deposit Program also locks you money away without access until you return from your deployment. If you are looking for a non-retirement investment option and don’t want to lock your money away for the duration of your deployment, then consider investing in stocks or mutual funds. Here is a list of the best brokerage accounts for cheap stock trades, if you are interest in going that route.

Where should military members start investing when deployed?

In my opinion, the first 3 investment opportunities are the best places to start, and I would work toward maxing those out if you can. Of course, that is a lot to ask if you are a junior enlisted member, but I have seen people do it.

The reason Roth IRAs and the TSP are great opportunities is due to their long term tax benefits. You won’t find another opportunity like this ever – civilians aren’t able to contribute to Roth IRAs or 401k plans with tax free contributions and make tax free withdrawals. This is an opportunity you can’t match or beat anywhere! The same goes for the Savings Deposit Program (SDP). A guaranteed return on investment of 10% is unheard of.

Finally, you always have the option of self-directed investments, investing how and where you want, without worrying about the contribution and withdrawal rules of IRAs or the TSP. These investment accounts don’t share the same tax benefits, but they offer more flexibility and are better for short term investing.

Related posts:2009 Veteran's Day Discounts
Why Military Members Should Open Roth IRAs

Military Savings Deposit Program (SDP)

Roth 401K for Thrift Savings Plan (TSP)

TradeKing $50 New Customer Promotion

Ryan — Mon, 09 Aug 2010 14:58:11 +0000

If you are considering opening a brokerage account, then now is a great time, because TradeKing is offering a $50 cash bonus for new customers. TradeKing is one of the top rated online brokerage firms according to Smart Money Magazine, Barron’s, Kiplinger, and several other major publications. It is also one of the brokerage firms I use for my own individual stock purchases.

TradeKing $50 Cash Bonus for New Customers

To receive your $50 cash bonus, you simply need to open a new TradeKing account by following one of the special promotion links in this article.

You must open the new Tradeking account between the dates of August 1-31 2010 and meet the following requirements:

Initial deposit of $2,500 or more

Account must remain funded with $2,500 or more (minus potential losses) for a period of 180 days

Must make at least one trade within 90 days of account opening

The account must be opened online, using a promotional $50 cash bonus link.

Already a TradeKing customer? Check out this $50 TradeKing refer a friend promotion. You can receive a $50 bonus for referring new customers. This offer also ends Aug 31, 2010.

Why TradeKing is a great online broker

In my opinion, and in the opinion of Smart Money Magazine, Barron’s, Kiplinger, and many other review sites, TradeKing offers one of the best all around discount brokerage firms. Stock trades are $4.95 each and $0.65 per option, making them one of the most affordable brokerage firms for regular stock trades and options trading. They also offer an online learning center, online community and forums, webinars, learning sessions, free trading and tax tools, top notch customer service and more. For more information about TradeKing, check out this TradeKing Review.

To take advantage of the $50 cash promotion, visit http://www.TradeKing.com/.

Related posts:2009 Veteran's Day Discounts
Free Stock Trades at Zecco – 20 Trades for New Customers

Benefits of Consolidating Financial Accounts

$100 Bonus for New USAA Checking Accounts

Heroes Earned Retirement Opportunities (HERO) Act

Ryan — Wed, 14 Jul 2010 09:38:16 +0000

One of the requirements of establishing and contributing to an individual retirement account (IRA) is that the contributions are made from taxable earned income. This is true for both the traditional and Roth IRA. This stipulation is in place for all taxpayers, however exceptions are made for military servicemembers who are on active duty. Due to the fact that combat pay is tax-free, servicemembers who spent an entire calendar year in a designated tax free zone were previously not permitted to contribute to IRAs because they did not have “earned income.” But that was prior to the Heroes Earned Retirement Opportunities Act being signed into law. The HERO Act as it is now know allows military members to contribute to IRAs even if their sole source of income is tax free compact pay and other non taxable income.

What is the Heroes Earned Retirement Opportunities (HERO) Act ?

The HERO Act was signed into law on Memorial Day 2006, allowing military servicemembers receiving combat pay to use that income as contributions toward IRAs. Prior to this legislation, servicemembers who received all of their income from tax free combat pay, were ineligible as contributors to a traditional or Roth IRA. Once the legislation was signed into law, servicemembers were able to not only begin making contributions to their retirement accounts but also amend previous tax returns (retroactive two years) to make and include contributions from previous years.

How does the HERO Act Benefit Military Members?

The HERO Act benefits members of the military by offering them the same opportunities to save toward retirement as other working Americans. Military servicemembers can choose to make contributions to a traditional or Roth IRA as well as the federal government sponsored Thrift Savings Plan. To better understand how this opportunity benefits servicemembes, consider the benefits of these retirement plans themselves.

Benefits of traditional IRA. The main benefit of the traditional IRA is that contributions made to the retirement account can be used as a tax deduction when you file your income tax return. This tax deferred option, allows your money to grow over the years. The main drawback of the traditional IRA is the fact that you will pay income at the time of distribution.

Benefits of a Roth IRA. The Roth IRA is similar to the traditional IRA, however they are taxed differently. Contributions to the Roth IRA are included in the amount of earned income you report on your tax return. Essentially this means you are paying tax on that money at the time of contribution. The benefit of course is that your money grows tax free due to the fact that you can withdrawal contributions and earnings without taxation after you reach the age of 59 1/2. Here is more information about the best Roth IRA companies.

The HERO Act gives military members investing opportunities

Clearly the biggest benefit of the HERO Act is that members of the military are not longer excluded from some of the best retirement vehicles available to American citizens. Saving for retirement is essential to ensure the financial independence of individuals and families once you are no longer earning an income from employment. In allowing servicemembers the opportunity to take advantage of the benefits of IRAs as well as the Thrift Savings Plan, the HERO Act provides financial security for the men and women who have answered the call of duty.
Related posts:2009 Veteran's Day Discounts
Don’t Stop Retirement Contributions

Why Military Members Should Open Roth IRAs

Best Investment Options for Deployed Military Members

Roth IRA Conversion

Ryan — Wed, 16 Jun 2010 11:31:10 +0000

Should you consider a Roth IRA Conversion?

Moving your money held in a Traditional IRA into a Roth IRA is called a “Roth IRA Conversion.” Many people choose to do a Roth IRA conversion because Roth IRAs have a tax advantage over Traditional IRAs in that the distributions are not taxable income. During the conversion process, the money you rollover from a Traditional IRA into a Roth IRA is added to your annual taxable income for that year.

When you pay taxes on the money you rollover, you pay taxes on the current value of the money, making it possible to take advantage of economic down turns through a Roth IRA conversion.

Future distributions from the newly created Roth IRA will be the same as any other Roth IRA, which is to say, they will be nontaxable. Investors who are in a low tax bracket often decide to invest using Roth IRAs because they expect to be in a higher tax bracket when they retire. Paying taxes on the money in a lower tax bracket will save money over paying taxes later when you are in a higher tax bracket. Many people choose to convert a Traditional IRA into a Roth IRA when the economy is struggling because their Traditional IRA will have less value than in strong economic times and it results in a lower taxable amount.

Who is Eligible for Roth IRA Conversions?

You must meet a few eligibility requirements for converting a Traditional IRA into a Roth IRA, including:

Living separate from your spouse for the entire year if your tax filing status is “married filing separately”.

Your modified adjusted gross income must be less than $100,000 in the years before 2010.

You cannot convert a Traditional IRA if you inherited it from someone other than a spouse.

You can convert Traditional IRAs to Roth IRAs even if you have made a rollover within the same year.

You can convert a portion of the Traditional IRA into a Roth IRA but not just the nontaxable part.

Two Options Converting Traditional IRAs into Roth IRAs

There are two ways to move money from a Traditional IRA into a Roth IRA. You can rollover the funds yourself by taking a distribution from the Traditional IRA and rolling it into a Roth IRA within 60 days; or you can contact the bank or broker who manages your Traditional IRA and instruct them to transfer the money into a Roth IRA for you.

Whether you choose to rollover the funds or do a transfer, it’s necessary that you use the entire Traditional IRA distribution amount to fund the Roth IRA to avoid early withdrawal penalties and fees. You can’t decide to keep some of the money out as pocket cash or to take a vacation, for example.
Related posts:2009 Veteran's Day Discounts
Why Military Members Should Open Roth IRAs

Choosing Between a Roth IRA and a Traditional IRA

Roth 401K for Thrift Savings Plan (TSP)

Why Military Members Should Open Roth IRAs

Ryan — Tue, 16 Feb 2010 14:56:29 +0000

Military members have one of the best pension plans in the US. After 20 years of service, military members can “retire” with a 50% pension. The percentage can go higher if members are willing to serve more time. But you’ll notice I put quotes around the word “retire.” For most military members, 50% of their pay will not actually be enough to maintain their standard of living throughout retirement. It is a great start, but it usually isn’t enough. Then you need to consider that most military members never complete the 20 years needed to receive military retirement benefits.

For these reasons, it is essential that military members take retirement planning into their own hands. And one of the best ways to do that is to contribute to your own retirement accounts that you can take with you anywhere you go – regardless of whether you remain in the military or separate from the service. One of the best plans most military members are eligible for is the Roth IRA, an individual retirement account that offers great tax benefits.

The benefits of investing with a Roth IRA

The Roth IRA is one of my favorite retirement account options because it offers great future tax benefits. Contributions to a Roth IRA account are not t ax deductible like a Traditional IRA, meaning you don’t get a tax break the year you make the contribution. But the benefit is that Roth IRA contributions come from money that has already been taxed, and it will grow without the drag of taxes until you make withdrawals in retirement. Provided you meet age or other requirements, you will not pay any taxes on your withdrawals.

Why military members should get a Roth IRA

In addition to the tax benefits mentioned above, there are three more reasons why military members should consider opening a Roth IRA as a retirement planning option. Military members can make Roth IRA contributions with non-taxable income making their contributions and withdrawals tax free, the can receive extensions to make contributions, and they often have lower tax brackets than their cash flow would suggest.

Contribute to Roth IRA with non-taxed combat pay. IRS rules require Traditional and Roth IRA contributions to be made from income that was subjected to federal income tax. This made it impossible for some service members who received non-taxable income from designated war zones ineligible to contribute to Roth IRAs. However, the The Heroes Earned Retirement Opportunities Act was signed into effect a few years ago (and and made retroactive to years after 2003), which makes it possible for military members to contribute to a Roth IRA, even if they did not pay federal income tax on their income.

This is a huge benefit because one of the requirements for contributing to a Roth IRA is using income that has been subjected to federal income tax. As we saw earlier, post tax money is contributed to a Roth IRA and withdrawals are made tax free. The HEROs Act makes it possible for some military members to contribute funds to their Roth IRA that has never and will never be taxed.

Additional time to make contributions. Military members who deploy to an overseas location may have additional time to contribute to their Roth IRAs. Roth IRAs already have a generous contribution deadline: You can contribute anytime from the beginning of the calendar year to the tax deadline. For example, you can contribute for a Roth IRA for the 2009 year anytime between January 1, 2009 and April 15, 2010. Military members who deploy may have a longer extension on top of this. Military members and their spouses may qualify for a deadline extension of up to 180 days after they return from a combat zone, hazardous duty area or certain other deployments. The extension doesn’t just apply to IRA contributions, but also to filing tax returns, paying taxes, and claiming a tax refund.

Lower tax brackets. Most military members actually receive more income than their taxable earnings would lead you to believe. Take, for instance, the BAH, BAS, and other non-taxable benefits you may receive. Depending on your rank and location, you could easily bring in $1,000-$2,000 per month in non-taxable income. These funds also don’t count toward your current tax bracket, meaning you are probably in a lower tax bracket than someone else with comparable “total” income.

This is a great opportunity to pay taxes at your current “low” tax bracket, make contributions to your Roth with post-taxed income, enjoy the compounding of your contributions without the drag of taxes, and make tax free withdrawals in retirement. Contributions to a Roth IRA when you are in a low tax bracket almost always beat contributing to a Traditional IRA because the future tax break will almost certainly be worth more than the current tax break offered by a Traditional IRA.

Opening a Roth IRA

Roth IRAs are flexible retirement plans that offer individuals the opportunity to invest in almost any form of investment. Roth IRAs are easy to open and transportable; you can transfer your Roth IRA to another bank or brokerage firm if you ever decide you want to move your money elsewhere. Here is a list of the best places to open a Roth IRA. You can also check with your current investment provider to see if they offer Roth IRAs.
Related posts:2009 Veteran's Day Discounts
Choosing Between a Roth IRA and a Traditional IRA

Best Investment Options for Deployed Military Members

Roth IRA Conversion

Free Stock Trades at Zecco – 20 Trades for New Customers

Ryan — Fri, 28 Aug 2009 19:53:17 +0000

Zecco is offering new customers 20 free stock trades – a $90 value - when they open a new Zecco Trading account before September 13th. To qualify for the 20 free stock trades, use the promotional code – “bonus1″ (Please note the code is case sensitive!). These free trades are in addition to the 10 free trades Zecco members can receive each month for maintaining a $25,000 balance or by making 25 trades per month.

20 Free Stock trades at Zecco

Stock trades normally cost $4.50 each at Zecco Trading, making 20 free trades equal to a $90 sign up bonus. New customers receiving the 20 free stock trades also have 90 days to use the free trades, which is much better than most discount stock brokerages, which typically only offer free trades for 30 days. A $90 value and 3 times the normal offer length makes this a great deal!

How to get your 20 free stock trades at Zecco Trading:

Open a new Zecco trading account by September 13th.

Use promotional code bonus1 (case sensitive)

Take up to 90 days to use free stock trades.

Additional terms and conditions for 20 free stock trades:

New Zecco Trading accounts must be opened & approved by Sept. 13, 2009.

Free trades will expire 90 days after the date they are granted.

Offer only available to new Zecco Trading customers.

Limit one bonus per household.

Zecco Trading Account features

Zecco offers stock trades at $4.50 each – among the lowest you will find among online discount brokerage firms. Zecco offers an online educational center, free stock trading tutorials and tools, and many other features. Customers are eligible to receive 10 free stock trades per month when they make 25 trades per month or if they maintain a minimum portfolio balance of $25,000. The 20 free trades can be used in conjunction with the free trades customers can earn based on portfolio amount or number of trades.

Join Zecco Trading and get 20 free trades with bonus code “bonus1″

Read more about Zecco:

Zecco Review.

Zecco, TradeKing and ShareBuilder Review.

Related posts:2009 Veteran's Day Discounts
TradeKing $50 New Customer Promotion

$100 Bonus for New USAA Checking Accounts

You Need a Budget Coupon Code – Save 10%

CD Ladders Are a Good Choice for Short Term Investments

Ryan — Fri, 29 May 2009 19:48:34 +0000

Where should you invest your money if you don’t want to take a lot of risk and you may need access to it in the near future? If you need the money within the next few years, you probably don’t want to take much risk with it. You should probably go for a guaranteed return.

Here is a recent reader question about where to invest money:

Hi, I am 68 yrs. old. I just came into some money and I need to put it somewhere safe; I don’t want to tie it up in a stock portfolio. Is there something that I can do to make a little money and still have access to it without going through paperwork to get it? I had thought about buying a condo with a couple people, and renting it out, but maybe there is something that I have not thought of, that some financial wizard can come up with. I need to make some decisions soon. I don’t mind investing it if can have ready access to it. Hope to get as many ideas and advice as possible. Thank you in advance, Kelley.

Short Term Investing

Hello Kelley, thanks for contacting me. The key with short term investing is realizing that you might need the money in a few years, so you want to avoid too much risk. Here are a few ideas for short term investing.

Avoid stocks and real estate. Since you are already at/near retirement age, you probably don’t want to put much money into stocks because of their volatility. Over short time periods the stock market can be wildly unpredictable and the last thing you want happening is having your portfolio down 30% when you need to withdraw the money.

If you need access to the money, you don’t want to tie it up into real estate, especially with other investors. Real estate investing with partners can be a tricky proposition because someone may wish to sell their equity, while others may want to keep renting out the property. You would also have to consider vacancies, maintenance, condo fees, and other situations that may arise.

Since you may need the money relatively soon, you should look into guaranteed investments.

CDs and savings accounts are guaranteed investments. As long as your bank is backed by the FDIC, then your Certificate of Deposit (CD) or savings account is a guaranteed investment and will not lose money. If you are investing for the short term and have a good idea when you will need the money, then a CD is not a bad way to go.

Choosing a CD ladders or savings accounts for short term investments

If you need full liquidity (access to the money at any given time), then I would recommend a high yield savings account, even though they may earn less interest than a CD. Savings accounts will never lose money and you should have unlimited access to your money.

If you want to earn more interest than most savings accounts and anticipate only needing some of the money at any given time, then I would recommend building a CD ladder. CD ladders will give you access to your money on a regular schedule – either annually or monthly, depending on how you set up the CD ladders.

The example used in the article above is a 5 year CD ladder, but you could just as easily build a 12 month CD ladder, ensuring you have access to your funds once a month instead of once a year. The other benefit of CD ladders is that if you have to break the CD, you only pay a couple months interest, which usually isn’t a big deal, and certainly isn’t as bad as losing a large portion of your principle as can happen in the stock markets, or having your money tied up in real estate.

As always, check with a professional financial planner before making any long term investing decisions.
Related posts:2009 Veteran's Day Discounts
How to Build a CD Ladder

Best Investment Options for Deployed Military Members

What is the Thrift Savings Plan?

Don’t Stop Retirement Contributions

Ryan — Tue, 21 Oct 2008 11:34:43 +0000

It’s been hard to miss the recent downturn in our economy – you see it on the news and hear it on the radio. The current financial crisis has caused most retirement accounts to lose a lot of money. While it’s never a good thing for your retirement accounts to lose money, especially when you are at or near retirement, it’s not the end of the world. The one thing you shouldn’t do when the market drops is stop your retirement contributions. In fact, now may be a good time to increase your retirement contributions.

It may seem counterintuitive to invest when the market continues to drop, but it actually might be the best financial move you can do right now. Remember, the point of investing is to buy low and sell high. With the market lower across the board, this might just be a golden buying opportunity.

An investment method that takes advantage of the buy low sell high principle is value averaging, which is similar to dollar cost averaging, with the exception that you invest more money when prices drop and invest less money when prices increase.

So whether you invest in the TSP, a Roth IRA or Traditional IRA, a 401(k), or other retirement plan, now is not the time to stop investing. It might just be a good time to increase your contributions. If you have an investment horizon of 10 years or longer, chances are your investments will have ample time to catch up.
Related posts:2009 Veteran's Day Discounts
2009 Retirement Plan Contribution Limits

Heroes Earned Retirement Opportunities (HERO) Act

What Should You Do with your TSP When You Leave the Service?

Be Careful Where You Get Your Investment Advice

Ryan — Tue, 07 Oct 2008 14:02:04 +0000

When you are investing, you should pay strong attention to where you get your information. Some information, like stock quotes are a commodity. You can get them just about anywhere – Yahoo Finance, Google Finance, CNN Money, etc. Just type in your stock symbol and you are good to go.

Most of these sites provide free historical information that you can view based on time periods such as current day, last week, last month, last 6 months, year, 5 years, etc. This information can be great for comparing how stocks have performed in the past. But one thing they don’t tell you is how the stocks will perform in the future.

Here are some investment tips you should beware:

An “inside tip” isn’t inside information if it is published

First off, insider trading is illegal. There are no ifs, ands, or buts about it. But some people think that they have inside information just because they read about a stock in an article on a popular website or in a reputable trade publication. In fact, that is just the opposite. Millions of people have access to the same information; you don’t have any investing advantage.

Beware of agendas and scams

Who is giving you this information? Is it your broker, who gets a commission on every trade? Did you get this info from an “insider e-mail,” a voice or fax that was sent to the wrong number, or a mailer touting the latest oil discovery in Canada? In the first case, your stock broker may just be looking to make a few extra bucks by churning your account. In the second instance, you may be falling victim to a penny stock pump and dump scam.

Beware of the office day trader

Two weeks ago my buddy called me at home. We work together and sometimes meet up on the weekends to hang out. But we don’t talk on the ohone much. So why did he call me? To give me a hot stock tip. He has mentioned this stock to me in several conversations over the last few months, and this time he mentioned it was set to make some very positive gains in the coming weeks due to a big announcement about some new technology (see the tip above). Long story short, with the current economic crisis, the stock he touted so highly dropped 50% less than a week after he bought the stock.

There are no guarantees

Investing has inherent risks. The stock market as a whole will move up or down on any given day, and has the potential to make or break investors. Don’t act unless you are aware of the risks. Start with a little education – stock market for beginners – then work your way up to more advanced topics.

This article was included in the Carnival of Financial Planning – October 27 2008 Edition.
Related posts:2009 Veteran's Day Discounts
Best Investment Options for Deployed Military Members

The Only Mutual Fund You Should Invest In

CD Ladders Are a Good Choice for Short Term Investments

The Only Mutual Fund You Should Invest In

Ryan — Tue, 01 Jul 2008 18:08:40 +0000

This is a guest article by Ryan Delany, aka HarvardMarine. Ryan is the author of Semper Finance, an investing blog geared to military members and individuals with a goal of improving their net worth.

The only mutual fund you should buy is an index fund.

The first and still the best known of these is the Vanguard 500 Index Fund. As the name implies, this mutual fund mimics the S&P 500 index. Why is investing in the S&P 500 a good idea? Because historically, it has averaged 11% annually. How many mutual funds can beat that? Not many.

Here are some more reasons why you should only invest in an index fund:

80% of mutual funds underperform the S&P 500. Scary, but true. Why waste your time trying to find one that’s going to do better, when there is an 80% chance you’re going to be wrong?

Index funds have significantly lower management fees. Having a highly qualified team to pick the fund’s stocks is expensive and it eats into the profits. An index fund doesn’t have to do any research; they just buy and sell the stocks to match the S&P or another index.

Mutual funds have too much money to invest very well. Think about it, you can’t invest more than a few hundred thousand dollars in a stock without driving up the price. If you have a billion dollars to invest, that means you will have to pick dozens of stocks. That means the management must constantly pick stocks and re-evaluate their current holdings. It also means that if any one stock does particularly well, it doesn’t effect the bottom line very much. There are only so many stocks out there for managers to choose from, when they have to pick 50 stocks that means only 10% of the stocks are in their top 5 choices, the other 90% are pretty far down the list. How well do you think their 48th, 49th and 50th choice are going to do?

Mutual funds are too hard to understand. Investors should always follow the axiom “Only invest in what you understand.” It is time consuming enough to evaluate one stock. Can you really expect to understand and evaluate all 50, 100 or 200 stocks in a mutual fund? If you’re going to take the time to understand the stocks in a mutual fund then you might as well just buy the stocks yourself.

Moral of the story: Don’t buy a mutual fund unless its an index fund.

Ryan says: Index funds have long been recognized to be attractive investment options because of the priciples outlined above. Vanguard is a great option because they have great funds and are generally among the lowest priced index funds available to the general public (Vanguard is a also non-profit company; their goal is to make it easier for investors to direct more of their money to their investments and spend less of their money supporting the company running the fund). This article is not meant to be an endorsement for Vanguard, but for index funds in general. As always, do you research before buying any equities or other investments.
Related posts:2009 Veteran's Day Discounts
Where Should You Invest – TSP or IRA?

Where Should You Invest – TSP or IRA?

What is the Thrift Savings Plan?