I have changed jobs and have money in my previous employers 401(K). I would like to take it out so I can control the investments better. Would I put it all in the Vanguard S&P 500 Index, and then take some out to purchase individual stocks (if I want to)? Basically, what's the easy way to use an index fund and buy stocks on demand?Thanks.
>> , what's the easy way to use an index fund and buy stocks on demand?--------------------------------You can hold an index fund (or any other mutual fund) within a brokerage account. This allows redeeming fund shares and using the proceeds to buy stocks whenever you want to. Keep in mind that when you redeem fund shares, the redemption takes place as of 4 p.m. when the markets close, but when you buy stocks, the purchase takes place as soon as your broker is able to execute it. One thing to check on is whether you would have to pay the brokerage a service fee to purchase no-load mutual funds. For example, my IRA brokerage, Waterhouse, has a long list of no-fee mutual funds, but charges $25 per transaction to purchase any other no-load funds. Now, what happens with the no-fee funds is that the fund sponsor pays the brokerage to handle the transaction, and then recovers some of the cost through the fund's internal fees. This means that the lowest-cost mutual funds, such as the Vanguard index funds, are not available as no-fee funds at most brokerages.For relatively short-term holdings, I wouldn't worry about this. As a rule, a broker that doesn't offer the Vanguard fund as a no-fee purchase will offer another that is acceptable even if not ideal. At Waterhouse this has been an Ssga index fund, with a return that is slightly less than Vanguard's. The difference would be more significant if you invested a large amount of money and left it there for a long time.But I'm not sure that it's a good idea to use a stock index fund as a place to park money until investing it in individual stocks. An index fund is just a basket of 500 (or however many) stocks, and if the money will only be there for a few months, the broker's money-market fund would make more sense to me.
TchrP writes (in part):But I'm not sure that it's a good idea to use a stock index fund as a place to park money until investing it in individual stocks. An index fund is just a basket of 500 (or however many) stocks, and if the money will only be there for a few months, the broker's money-market fund would make more sense to me.I reply:I think it does make sense to use the stock market, rather than a money market fund, as a short-term parking place for money while waiting for a Foolish Four rebalance date. Although you have extra risk of losing money, because the index fund will outperform the money market fund on average, you will have more money after 20 years if you consistently use the index fund rather than the money market. --Bob
I think it does make sense to use the stock market, rather than a money market fund, as a short-term parking place for money But you also need to take into consideration fees. Index funds are mutual funds, so in some accounts you may get hit with a buy fee, whereas MM, frequently that is the designated hold spot, with no fees to move in/out. Number crunch to see if the amount of dollars justifies using the index instead of the MM (I know, it's a pain).Kristi
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