Q. I am married and both my husband and I are retired. My husband has always managed our investments but is now in declining health. I feel I should be learning the basics of investing. I have gone to presentations on the subject. And I’ve read your column. But I sometimes don't even understand some of the terminology being used.
My husband and I have individual IRAs with Schwab and in the past, when things got a bit scary; we pulled our money out of most investments. So now the cash is just sitting there. I know this is not good. Can you suggest a book or books or the best way I might gain a basic understanding of investing. I would like to learn enough that I can move forward with future investments. My hope is to at least cover inflation. —J.D., Austin, Texas
A. For an easy and right-to-the-point start, pick up any books in Dan Solin’s “Smartest Book” series. They are breathlessly short and he piles all the supporting information into a chapter at the end. You might start with “The Smartest Portfolio You’ll Ever Own: A Do-It-Yourself Breakthrough Strategy.” Then you could move on to “The Smartest Retirement Book You’ll Ever Read.” Or, “The Smartest Money Book You’ll Ever Read: Everything You Need to Know About Growing, Spending, and Enjoying Your Money.” His books are quick reads, so you can read them in an afternoon. They are also available in paperback and Kindle editions.
After getting comfortable with Solin, get your knowledge reinforced by William Bernstein’s “The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between.” This book is also available in both paperback and Kindle editions.
Read these writers and discover that the vast majority of public discussion of investing is misleading or unnecessary. Whether it is what you see on television, hear on the radio or what is offered by your kindly church-going insurance salesperson, the primary reason for most investment “information” is to make transaction income for someone. Someone who isn’t you.
Q. I enjoy your columns on low-cost investing. Do you have any suggestions about major domestic stock index funds and major domestic bond index funds? Maybe names of several which you might know to be well managed. —B.M., Seattle, Washington
A. Nothing succeeds like success. According to the Morningstar database, there are now 291 ways you can buy an index fund that specializes in large-cap domestic stocks. Often the same fund is distributed through channels with different costs. The way to get the best fund is to look for the ones with the most assets and the lowest costs. Over the last 10 years, for instance, every one of the largest 15 of these funds beat the average of the 291 funds in the category. So big is good, just as cheap is good.
What you don’t need are index funds in the same category that don’t have much in assets and that have high expense ratios. Believe it or not, 30 of the 291 funds have expense ratios of at least 1.30 percent! That's higher than the average managed fund. Most have less than $50 million in assets under management.
The big, tried-and-true funds are: SPDR S&P 500 ETF (ticker: SPY), Vanguard 500 Index Admiral shares (ticker: VFIAX), iShares Core S&P 500 ETF (ticker: IVV) and Fidelity Spartan 500 Index (ticker: FUSEX). In the same group, the Vanguard Total Stock Market Index Admiral shares (ticker: VTI) covers the entire domestic stock market—large, mid and small cap—at a cost of only 0.05 percent a year.
The same principles apply in fixed income funds, but there are far fewer of them. If we limit selection to intermediate-term government bond funds, the largest, most liquid and most inexpensive are: iShares 3-7 Year Treasury Bond fund (ticker: IEI), Fidelity Spartan Intermediate Treasury Index fund (FIBIX), Schwab Intermediate-Term U.S. Treasury ETF (ticker: SCHR) and Vanguard Intermediate-Term Government Bond Index (ticker: VGIT). Costs are a bit higher here, running from about 0.10 percent to 0.20 percent a year.
In both the large cap and fixed income categories, the larger the fund, the greater the probability that it will track its index accurately.