Section I - Lesson 4D
Financial Plan - An Ideal Investment Vehicle
Step four of your financial plan will be to arrange for your two separate income streams to be invested into an ideal investment vehicle in each of your two accounts.
Our choice of mutual fund, if it’s available to you, would be a low-cost, no-load Standard & Poor 500 Index fund, which are offered by many of the major mutual fund companies. We’ll talk a great deal more about this subject of an ideal investment vehicle later on in this course.
Before the advent of S&P 500 Index funds, first introduced by the Vanguard Group in the 1970’s, our selection process would have been infinitely more difficult. We would have needed to select one or more investments from thousands of available securities and managed mutual funds. Being able to invest in an S&P 500 Index fund eliminates the need for this selection process.
In days gone by there were two major determinants for being a successful investor: how well you could “pick” stocks and how well you could “time” your transactions. We’ll talk about timing in the next lesson, but as far as picking which stocks to buy, or even which mutual funds to buy, the advent of index funds have reduced this to a no-brainer.
When you buy shares of a market index like a Standard and Poor 500 Index, you can expect to get the rate of return of the overall market. This annual rate of return since 1926 has been 10.5%. The S&P 500 Index is composed of the stocks of the 500 largest companies in America and is said to represent 70 percent of the value of all U.S. traded common stocks.
The S&P 500 Index consistently outperforms all but a handful of managed mutual funds every year, and rarely does the same individual mutual fund continue to beat this index over any extended period of time.
A Standard and Poor 500 Index fund therefore provides a simple, easy solution to the challenge of selecting “right” securities. No selection is required! With this fund you will always be widely diversified in a broadly based cross section of the American economy and should expect to prosper over the years to the same extent as our country prospers.
In your regular money account, when you instruct your mutual fund company to automatically invest your money every month, you’ll specify an S&P 500 Index fund as your investment. All of the major mutual fund companies provide such a product, and you should have no problem finding one.
In your retirement account, if it’s a 401k plan, you’re required to choose your investment from a limited list of products made available to you by the plan sponsor. This list may or may not include an S&P 500 Index fund as a possible choice. Needless to say, if such a product is on the list you should pick it. If not, you should pick the security that most closely resembles this product and we’ll discuss this subject in great detail in Section III-A.
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