Total Stock Market Investing As a College Student or First Time Investor
There are things we don't know we don't know.
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When I was in high school, I took a social studies class with Mr. Diodato. That class kick started my love for stocks and investing. For one of our projects, we had to find companies to invest in. For a few weeks, we had to check in to see how our picked stocks were doing. We had to peruse newspapers to see what the closing prices were and write them down. (Yes, newspapers! I'm apparently that old.) Fast forward many years later and I continue to invest, read up on stocks and see what's going on.
Investing is a scary act. It involves risk and reward. It involves research. It involves understanding how companies work and how company information is presented in financial statements. There's an old advice out there that says "invest in what you know" meaning support the companies that you would buy from. For a period of time, I invested heavily in an index that tracked against the growth of the S&P 500. This was a hands off approach and one that I would recommend to those just starting out. There's a lot of volatility (ups and downs) with investing in single companies so instead the idea is to invest in an index fund or a mutual fund that already has a diversified list of companies (meaning the basket consists of various companies from many industries.)
VTSAX, FSTVX, Oh My!
In the FIRE community, there's a lot of discussion and conversation around investing in two funds. These funds cover the total stock market which means it is bench marked against the total market stock index. So when the stock market rises, these two funds will as well. Let's take a look at them. The two most popular are VTSAX and FSTVX. Side by side, they look to be on par with each other. Read more about the discussions between these two funds here and here and decide for yourself which one is right for you taking into account if you are investing in a taxable account.
VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares (0.04%/$10,000/$1)
VTSMX - Vanguard Total Stock Market Index Fund Investor Shares (0.15%/$3000/$1) - lower min of VTSAX
FSTVX - Fidelity Total Market Index Fund - Premium Class (0.035%$10,000/$1)
The Challenge With Being a College Student or First Time Investor
These two funds are amazing to invest in because they grow with the market. It's a hands off approach to investing. Read JL Collins post for a more in-depth analysis of why these are favored in the FIRE community. The challenge, however, when I was helping my younger sister (she's 22) start her investment account was the high minimum required to invest in the two funds. The requirement is $10K. Now, she doesn't have that kind of money yet being a senior in college so we went to look for an alternative that she could start with. We needed something that 1) covered the total stock market 2) had a low minimum 3) had low expense fees. As her account grows with her contributions and re-investment, there's always the option to transfer to a similar fund with even lower fees.
When investing, we want to make sure we have a diversified portfolio meaning we aren't putting all of our eggs in one basket and have a good mix of stocks and bonds. For the purposes of this post, we are only focusing on the stock side. For those investors who are very early on their FIRE journey (i.e. young and can take advantage of time), investing in stocks is valuable as stock trends increase over time. Of course, as you near retirement, it's good to consider adding bonds to the portfolio mix to reduce your risk and exposure. With these Total Stock Market Funds, they invest in global, international companies so can also opt to decide to add an International Fund to the mix. For the sake of this article, we are focused on someone who is new to investing, has limited funds and is very early in their FIRE journey. We have only considered stock investing at this point in time, but follow along and see how this changes over time.
On another note, the stock market is at all-time high and signs of correction have been popping up. If you've not been distracted by some of the other news, consider what this can mean for you as an early investor. Of course, this will be a scary time to invest and a correction could come anytime, but there is no way to predict the market and for a long-term investor with years to go, this could be a good opportunity to park the dollars, contribute small amounts and take advantage of a dip.
So after much research, we decided to go with:
SWTSX - Schwab Total Stock Market Index Fund (0.03%/$1/$1)
Depending on where you purchase, the fund has either no minimum or it's very low and affordable for those just starting out. If we compare it with VTSAX, it has a similar trend line.
I like SWTSX because it has a fairly low expense fee and the buy-in is also very low.
How Do We Get SWTSX?
My sister had CapitalOne Investing as her brokerage firm which held stocks that we wanted to sell so that we could purchase SWTSX. The rub is that CapitalOne Investing has such high fees: $6.99 to sell, $19.99 to purchase a mutual fund transaction which seemed ridiculous. So here are the options that we looked at:
Stay with CapitalOne Investing. Sell her stocks and purchase the fund. Total transaction costs would have been around $27 ($19.99 buy transaction fee + $6.49 sell transaction fees).
Open a Charles Schwab account as they don't charge fees on their own funds and there's currently no investment minimum at the time of this writing. This may change so make sure to read the fine print of this fund.
Open an eTrade account as they don't charge fees for this particular fund and they have no minimum investment requirement. eTrade does have a $6.95 transaction fee for stocks and ETFs. They have around 9,000+ available mutual funds and 4,400 are no-load, no-transaction-fee and. SWTSX is no load, no fee. Because this is a no transaction fee fund (NTF), there is an early redemption fee of $49.99 within 90 days or less.
Open an Ally account as their standard rate is $4.95 per online stock and ETF trade and $9.99 for mutual funds with no minimum account balance AND no minimum trade activity. Purchasing SWTSX at Ally incurs a $9.95 commission and there is a $100 initial investment deposit for this particular fund.
We had many options at least. After careful review, we opted not to do anything. She will be receiving earned income from an internship in May so we have planned and put a calendar reminder to open a ROTH IRA with the money she earns and invest that in a Total Stock Market Fund. Because this is meant to be a long-term investment in a tax-advantaged account with no immediate sell date, we will look to the company that has no transaction fee.
She most likely will not be adding on to her Brokerage account in the near future unless she decides to allocate some of her internship money towards it so her existing stocks will remain in CapitalOne Investing. We will follow-up if this changes.
Are you new to investing? How has your experience been? Have you thought about investing in a Total Market Fund?
I consider you to review the available funds out on the market. For long-term investing, select one that has low transaction fees and low maintenance fees. Fees can eat up your returns so be careful with them. Imagine ordering a whole pie and having a slice taken out, that's what fees do to your portfolio. Don't be one slice short!