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Comment by encoderer | Hacker News Reader

As a layman who has done a lot of research, I have 3 pieces of advice for people investing their 401k/IRA:

1) No Load Index Funds.

2) No Load Index Funds.

3) No Load Index Funds.

Seriously people. If your fund selection is so poor in your company's 401k that they don't have a single No Load Index Fund, lobby your HR to get one added, and put your money in the lowest load Index Fund, and put only the very minimum in there to get your company match, and put the rest in an IRA at a company that gives you the option of a No Load Index Fund.

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+1, except where there is a choice between a big liquid ETF and a similar no load index fund I would in most cases pick the ETF for tax efficiency. (unless for IRA/401K, tax not an issue)

When you buy an index fund, you get a 1099 and pay capital gains taxes on any profits the fund takes any time it trades; also when you buy it you buy into the fund's tax basis, so if they bought all their stocks lower than where they are now, you would pay capital gains taxes based on where the fund bought them instead of from the price when you bought the fund. You might even take a capital loss and still have paid capital gains taxes.

see for instance http://etf.about.com/od/etftaxes/a/ETF_Tax_Benefit.htm

Which is why most people buying funds should buy their index funds through Vanguard. It's not a sales pitch. This company, owned by the fund holders, is the lowest cost way to buy index funds. Probably the only lower cost way to own stocks is to buy them directly through the company via their dividend reinvestment programs, but then you aren't buying an index and you are wasting your time.

I'm always amazed at people who don't do do this or know about them.

I stopped trying to convince people that no matter how good "their guy" is, he has to do amazing to offset his fees. And not just be amazing occasionally, but be amazing all of the time.

If you dig into it, the math for mutual fund managers really just doesn't make that much sense at all.

Can you explain what you mean by a No Load Index Fund? Can you give an example or two? Thanks.

A type of fee commonly levied on mutual fund investors is called "Load." It's a fee you pay either when you buy shares of the fund (front load), or when you sell them (back load). Load is evil and should be avoided.

Index Funds are mutual funds that are not managed. That is, there's no manager and team of assistants that spend time curating the assets in the fund. These peoples salaries and their trading activities cost money and that comes out of your gains.

Index funds are simple: Take a snapshot of the market, say the NASDAQ or S&P 500. Determine the total pie -- add up the market value of all the companies in the index. Suppose AAPL is 15% of the total value, MSFT is 10%, etc. Take all the assets in the fund and spend 15% on AAPL stock, 10% on MSFT stock, etc. Rebalance periodically as needed.

Index funds have historically out-performed most managed funds. There are some winners. Some managed funds that have huge market-beating gains. But trying to pick these big winners is not a sound investment strategy.

It's a mutual fund that's designed to follow a particular stock index. For instance, there are funds that will exactly mimic the Dow Jones Industrial Average, or Standard & Poor, or other such indexes. And there's a pretty large number of indexes, so if you have an interest in biology, or tech companies, or junk bonds, you can find an index for it.

Here's the Vanguard fund for the actual Dow Jones Index: https://personal.vanguard.com/us/FundsMSChart?Ticker=^DJI

As for "no-load", that means there aren't any fees taken out of your account. Mutual funds take fees from your account to pay for their trades, and it's usually 1-2%. Index funds are brain-dead to manage, so they usually have either a very low load, or no load.

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