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Savings account (stuffed mattress) vs. Index Fund? Mutual Fund? ETF? Where do I begin investing?

Over a period of time I have set aside a portion of my bi-weekly income to my savings account and it has grown to a healthy size. (~6 months worth of emergency funds)

The interest rate on my savings account is so small that I may as well be stuffing it under my mattress, so rather than continuing to build that out, I want to put my future earnings towards something with a higher return that is still very accessible.

I think this rules out an IRA because of withdrawal penalties?

I don't want to buy individual stocks because that gets messy (trading costs, time spent researching companies, risk, etc.)

What type of investment can I put my bi-weekly chunk of change into (automatically transfer the funds) without having to incur a trading cost every time, and that I will have the ability to get out of rather easily?

Thanks for any help you can provide!

Jun 26, 2013 by Susan from Scottsdale, AZ in  |  Flag
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9 votes
Steve Cernak Level 16


Thank you for asking this question. I would encourage you to: (1) define your goals and priorities, (2) create a strategy, (3) implement investments, and (4) monitor the investments relative to your needs.

First, explore what your priorities are. What would like to accomplish with your wealth? How long would you like to maintain your investment? When might you need to access your funds?

Second, define a strategy. Without a plan, you plan to fail. This allows you to ask, “Do I have any financial blind spots?” Returns are important but so is limiting risk. You want both to balance.

Third, you would have to identify investment managers who employ strategies that best meet your investment strategy. Who you choose to do business with should align with your objectives.

Fourth, and lastly, you would need to track your portfolio’s progress relative to your goals. Your initial investment mix might not suit you over your entire lifetime, so adjustments should be made as needed.

Based on the given information, I would recommend a managed mutual fund account – professional management of mutual funds (or ETFs), as per your stated investment philosophy.

If emergency access to funds is a concern, you could borrow against the investment. This low-interest loan would be appropriate only if there was a short-term liquidity need, where selling outright would be disadvantageous.

Best, Steve

Comment   |  Flag   |  Jun 26, 2013 from Alexandria, VA

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8 votes

Hello Susan,

This is a common question actually, especially in this low interest rate environment. First, remember all investing entails risk. Just ask any bond fund investors this year. When you venture outside of bank products, you are outside of the realm of guaranteed values.

If you are comfortable with that risk, you do have options. I think two of your ideas are good ideas. Index funds would work, as well as ETFs (although I do not prefer to use them). I would stay away from actively managed mutual funds as a rule, as they customarily have higher expense ratios, and furthermore they come with the extra costs of trading their portfolios. This cost is not included in their reported expense ratios. Bottom line, increased costs with most times no added return.

But, you can still make a bad investment with an index fund or an ETF, even if they are cheap. Make sure you are able to understand the risk you are taking when selecting your particular fund or ETF. Also, along with that, diversification is paramount- but it’s a very “fuzzy” concept thrown around loosely. Does your fund own just one class of stock, or bond, or will it own a variety (a variety meaning more than two or three)? This is an area where many individual investors stumble unfortunately.

Comment   |  Flag   |  Jun 26, 2013 from Oshkosh, WI

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5 votes

Hi Susan! Congratulations on doing what most people don't - having an emergency fund built prior to investing! You are on the right track. I know that a saving account doesn't earn much, but it is OK to leave money there as long as it matches your goal. If you feel you can put some of this money at risk, then finding a suitable investment is a good idea. No-load mutual funds do provide a way to invest on a regular basis with minimal investment costs. You can set one up directly online with a mutual fund company such as Vanguard or Fidelity, or you can work with a full-service broker. In either case, it's a good idea to work with a financial planner to be sure the investment you choose fits your goals and comfort level for the ups and downs of the market. Spending an hour or two with a fee-only advisor can help you with your selection. Good luck!

Comment   |  Flag   |  Jun 26, 2013 from River Hills, SC

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4 votes


This is a very difficult time to find solutions for what you are looking for. I do agree with you that having your money in the bank is probably not a great place because you are most likely losing money to inflation due to bank rates being so low.

If you are willing to take some risk, I would recommend finding a fee-only advisor in your local area who should provide you with a risk profile questionaire or have another means of identifying how much risk you are comfortable with taking.

Fee-only advisors generally work with custodians that have access to a variety of no-transaction cost, no load mutual funds, which provide the liquidity you are seeking as well as diversification. They should also be able to give you suggestions as to what funds to invest in and as a fee-only advisor they will undoubtedly be acting as a fiduciary for you.

Comment   |  Flag   |  Jun 26, 2013 from St. Louis, MO

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4 votes
Alex Bentley Level 18

You already have some great answers to this question. But you are starting at the end, not the beginning. The first thing you need to do is understand your time horizon (when will you need the money?) and from there you can start to understand how much risk you are willing to take (your asset allocation, or split between stocks and bonds). From there I would suggest broadly diversified index funds from the Vanguard Group to achieve your objectives.

This is a high level answer to something that requires real thought and perhaps some help. Consider hiring a financial advisor.

Comment   |  Flag   |  Jun 26, 2013 from Pacific Palisades, CA

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4 votes

Further to the idea of using an advisor, be familiar with the various ways advisors are paid, and choose one that is right for you. Commission based advisors make money only if they sell you a product (insurance or mutual fund for instance). Fee-only advisors charge you a fee based on either the amount of investments they manage for you, or based on an hourly fee for the time they spend with you. Fee-based advisors may use a combination of fees or commissions depending on the client and project. Since you probably have only a little to invest, most advisors who charge based on assets won't want to work with you. (sad but true...). I would recommend you seek a financial advisor who will charge by the hour, who can answer all the very good questions brought up by the earlier contributors, help you figure out where best to park and/or invest your money, and come up with a plan for building a secure financial future. He or she can help make sure you understand risks of investing, and that the risks you are taking are appropriate. Another good reason to retain an advisor, is that you will always have someone who knows your overall financial situation to help with future situations or questions that may arise.

There are many very good advisors who are paid by commission, but I would hesitate because it may be (as some here alluded to) that the best thing to do is to continue adding to low interest savings. An advisor paid by an hourly fee has nothing to lose by telling you that, if he/she thinks it is best. But an advisor paid by commission would be working for free.

Comment   |  Flag   |  Jun 26, 2013 from Bridgewater, NJ

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3 votes


My advice is very simple. It appears that you are saving for an Emergency Fund. If that is the case, you most likely do not want to take risk with this money. It should be invested in Money Market Funds and/or CDs.

Now, if these are not your Emergency Funds, then the next question is where and how to invest it. Just like no two recipes are similar, there is no standard way to do this. It all depends on your objectives, risk tolerance and time horizon. Whether you invest using ETFs, Mutual Funds, etc. is a secondary issue, as they both have pros and cons. We recommend a Core-Satellite approach where you use ETFs in the core to reduce costs and Mutual Funds as Satellites to augment returns.

If you would like to learn more feel free to give us a call at 920-785-6010. Thanks,


Comment   |  Flag   |  Jun 26, 2013 from Appleton, WI

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3 votes

Susan, Having saved enough for an emergency is a great accomplishment. I understand that it is frustrating to see your hard earned savings account earn next to nothing at your bank. Your emergency fund should be kept exactly where it is today. You have several options on what to do with future contributions you decide to make. I would recommend you ask friends, families, colleagues or search Brightscope for a fee only investment advisor in your area. They will be able to develop a strategy for you based on your goals and objectives. You could also go it alone and open an account at a mutual fund company like Vanguard which would allow you to invest in a low cost manner on a recurring basis.

Comment   |  Flag   |  Jun 26, 2013 from Leawood, KS

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2 votes
Rich Winer Level 20

Susan, here are my thoughts. First of all, congratulations on accumulating 6 months worth of emergency funds. That and your desire for a plan to grow your savings puts you way ahead of many others.

Before we can develop an investment strategy, you need to be clear about what you want to accomplish and realistic in your expectations. The jump from CDs and savings accounts to stock and bond mutual funds is a big one in terms of potential returns and potential risks. This year is a good example of what I'm talking about. Most people assume that bonds or bond mutual funds might be the next step up the risk ladder from CDs and savings accounts; and while that's usually true, there are times when bonds are as risky as stocks. So far this year, stocks are positive while bonds are not. Bonds are actually negative on the year. My point is that there are potential short and long-term risks in both stocks and bonds (or stock and bond mutual funds). That's why I think you should not invest money in the stock and bonds markets with anything less than a 3-5 year time horizon.

You mentioned that you want to invest in something with a higher return that is "easily accessible." I can only assume that if your money is easily accessible, you either plan to use some of the money in the near term or will be tempted to "access" your money should a need to do so arise. That is not a good plan. Buying stock and bond mutual funds with anything less than a 3-5 year time horizon is speculating, not investing.

If you have a 3-5 year investment time horizon but think there's a small chance you might need some money from your investment portfolio, you might consider investing a portion of your portfolio in a traditional or Roth IRA and the rest in a taxable account. That will give you tax-deferred growth in at least a portion of your portfolio and make you less likely to tap those funds prior to retirement.

As far as whether to invest, that would depend on how much money you have. If you're just starting out building your retirement nest egg, I'll assume that your portfolio will be fairly small. A very simple strategy would be to invest half in an S&P 500 index fund and half in a total bond market index fund. This will immediately give you a balanced portfolio. Over time, you might consider reinvesting the income generated from the bond fund in the stock fund. That would be a disciplined, systematic way to gradually build up your stock allocation. This is obviously a very generic, simplistic approach for someone with limited funds. I would need to know a lot more about your financial situation, risk tolerance, time horizon and return objectives to determine if this approach is appropriate for you or if there might be a better approach. It would at least get you started.

As you accumulate more money, you can consider more elaborate investment strategies as well as whether you want to invest in passive or actively-managed mutual funds. You might consider reading some good books such as A Random Walk Down Wall Street (which makes the case for passive investing). I can't really think of any books that provide a good overview of how to pick actively-managed mutual funds. Bill Donoghue's Mutual Fund Superstars and Michael Hirsch's Mutual Fund Wealth Builder are the only ones that come to mind. Both are old and out of print, but pretty informative. You might also try to find one or two of the better performing mutual fund newsletters. No Load Fund X might be a good one to check out. They have a good, disciplined approach.

Please feel free to let me know if you have any additional questions. Good luck.

2 Comments   |  Flag   |  Jun 26, 2013 from Woodland Hills, CA
Rich Winer

In paragraph 4, I meant "as far as WHERE to invest." I wish there were a way to correct that, after the fact.

Flag |  Jun 26, 2013 near Woodland Hills, CA
Rich Winer

Actually, it was paragraph 5... :-)

Flag |  Jun 26, 2013 near Woodland Hills, CA

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2 votes

Susan, there are 3 points I'd like to make.

First, money you have saved for an emergency fund should be in a safe place. When the market goes down, as it has last week, your emergency fund at the savings bank should have been unscathed. Other than Cd’s and savings accounts, there are relatively safe investments, but they all involve some risk.

Second, though you want your money to be liquid, I have heard nothing about saving for retirement. As part of an overall financial plan, you should allocate a portion of your earnings for retirement. Yes it is true that money will not be liquid, there are tax advantages that, arguably, you cannot easily get anywhere else.

Third, I would argue that your best value is with a fee-based advisor. Look for a local CFP® that can give you the specific good advice you are seeking. Ask trusted friends, colleagues, and family for referrals. Interview them, and find one that relates to you and you feel comfortable with. Each advisor will have their own investment strategy. It may involve ETF’s on mutual funds or third party institutions money managers. I suggest, as a thoughtful woman, that you develop, over time, your own financial investment strategy, and utilize a financial advisor with like views.

Comment   |  Flag   |  Jun 26, 2013 from Delray Beach, FL

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