Index Funds or ETF's … you choose …

For those of you trying to ramp up your long-term savings plans, Index Funds and ETF’s offer two great alternatives to CD’s and savings accounts … and a MUCH better alternative than typical Mutual Funds (due to lower costs and similar or even better results).

But, don’t kid yourself, these are savings plans, not Investment plans (there is a difference) …

But, if you are committed to saving rather than investing, you have CHOICES.

Specifically, you can now choose between two very low cost options: Vanguard Index Fund (or similar) or ‘Spider’ ETF (or similar).

There was a great post on The Simple Dollar that I think summarized the differences very neatly:

An ETF is an exchange traded fund … a specific example is the Spider ETF, which matches the S&P 500 in much the same way that the Vanguard 500 does.However, in the end, they’re still not the best deal, as pointed out by this Forbes article.

The Simple Dollar post also talks about what to do while you are saving for your entry fee (unlike a bank, you can’t just plonk down $50 every time you want to buy a few shares in the fund) ….

…. if you are in serious saving mode, why don’t you take a read?

But, why Index Funds or whole-of-market ETF’s in the first place, why not mutual funds?

For answers to these questions, I usually try and go straight to the ‘top’ …

… to the greatest expert in that field that I can find. And, in the field of stock investing there is no better advice than that given by the World’s Greatest Investor himself, Warren Buffet, who once said:

The “know-nothing investor” should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. [W. E. Buffett – 1993]

Who would argue with the World’s Richest Man?

Important Note: 7million7dollars does NOT currently invest in any Index Funds, Mutual Funds, or other “Packaged Investment Products” … apparently, he is just a (rich) product of the Stone Age 😉

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8 thoughts on “Index Funds or ETF's … you choose …

  1. I’m not a huge fan of the index funds and ETFs. My 401k only offers a variety of funds, but I participate in it more for the match than the investment options.

    I then use a Roth IRA to purchase individual stocks so I don’t have to worry about any taxes.

    Other than these I’m going after rental properties, but have been distracted by some hard money lending opportunities.

    I agree with your savings vs. investments point of view though.

  2. @ Fiscal Musings – Great combination of strategies! Thanks FM (anytime you want to pen a ‘guest post’ about how and why you are investing, feel free to do so! Please.) …

  3. Any suggestions on a strategy to use for retirement accounts if you earn beyond the limit for a 401k and Roth Ira? My wife and I will have our debts extinguished(aside from fixed mortgage at 6% and student loan at 2.8%) and at least 6 months of living expenses liquid by the end of this year and my timetable to begin investing is by the end of this year/beginning of 2009. I have no company match for a 401k, don’t own the practice that I run, get hit hard in taxes and have discovered that there is an income limit to a 401k and Roth IRA and our income is projected to increase dramatically soon due to passive income via additional clinics that I helped startup. Any suggestions?

  4. @ Docsd – If you still have plenty of working years left, I don’t like investing inside the company 401k except to get the ‘company match’ (free money … yee hah!), or Roth IRA, etc. UNLESS you can (a) choose the investments, and (b) leverage those investments.

    Delayed Gratification means that you get to SPEND (!) but only AFTER these excellent strategies (debts extinguished, at least 6 months of living expenses, passive income, etc.) produce more income than you need to invest (20% rule etc.).

  5. Gotcha! Well I definitely still have plenty of working years left, I’ve pretty much just gotten started. And i’ve always felt pretty much the same as you regarding 401k’s and Roth IRA’s. They just always seemed to me to be the plan to be wealthy by my 60’s but not by my 40’s. Also, the fact that you get penalized so much for withdrawing before 59 1/2 doesn’t seem to chime with my goals. The only interest I had in retirement accounts was to help shelter some of the taxes.

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