This post is part of the “Step-by-Step Guide to (Passive) Military Investing” series:
- Maximize your TSP matching
- Eliminate your consumer debts
- Start investing small (1%)
- Buy investments
- Increase your monthly contributions
- Diversify
- Keep buying and holding… don’t panic sell!
Once you have money in your investment accounts – either in the TSP or an IRA or Roth-IRA – it’s time to invest. We will do this by buying index funds.
Step 4A: In the TSP, buy Lifecycle funds:
In TSP, the easiest way to get started is to buy a Lifecycle, or L Fund. These funds give you a diversified mix of the TSP’s index funds (the C, S, I, F, and G funds) and slowly balances them out over time as you get closer to retirement.
If you have many years until retirement, do not pick the “L Income” fund. That fund is meant for people who are retired right now. It holds a large amount of low-risk but low-reward funds (like G fund) that is not right for someone with decades left before retirement.
You can get fancier, but the L Funds are a good place to start. I personally like to buy the individual funds, as I like the flexibility of deciding my ratios of stock index funds (C, S, and I funds), bond index funds (F fund), and low-risk government securities (G fund) I want to hold. However, the most important thing is to get your money invested so it can start working for you.
For more step-by-step directions on how to allocate your funds in the TSP, please check out my previous post, “Don’t leave your TSP investments (only) in the G Fund”.
Step 4B: In an IRA or Roth-IRA, buy no-load, low-fee total market index funds
If you have money in your IRA or Roth-IRA account, then you can start buying funds. You have nearly every possible investment at your finger tips, which is both a blessing and a curse. Too many options make it hard to decide. Hopefully I can help narrow down your options.
Based on what I’ve learned so far, the majority of your investments should be in no-load, low-fee total market index funds. Let’s break down what this is:
- No-load: There is no upfront costs to buy shares in this index fund
- Low-fee: All index funds charge an annual fee (to pay for managing the fund). However, these fees can greatly reduce the amount you get to keep.
- Total Market Index fund: Basically, this fund invests in the whole market. These funds passively buys stocks based on their proportion of the market (if Apple is 2% of the market, 2% of its holdings are Apple). As a result, these funds are diversified across the whole stock market, making them much less volatile and risky than trying to pick individual stocks. In a world where the majority of active fund managers fail to match the returns of these passively managed funds, total market index funds are usually a better bet than picking individual stocks.
There are a number of ETFs and index mutual funds that meet this criteria. Here are a few that I’ve found:
- VTI – Vanguard’s total market index ETF. It charges 0.03%/year in fees, with no load. Vanguard is also the company that created index funds, so they have a solid reputation in this space.
- VTSAX – Vanguard’s Total Stock Market Index Fund Admiral Shares. Charges 0.04%/year in fees, with no load. This is a mutual fund vs. an ETF.
- SWTSX – Schwab’s Total Stock Market Index mutual fund. It charges 0.03%/year in fees with no load.
Note: One thing I’ve learned is that though these funds do not charge an initial fee, your brokerage company may charge a fee for mutual funds from other companies. For example, Schwab doesn’t charge a fee to buy their own mutual funds, but does for other company’s mutual funds (like Vanguard). Take this into account when you are deciding which company to open your accounts with.
Return to the Step-by-Step Guide to (Passive) Military Investing” series