Section IV - Lesson 2
Establishing Your Regular Investment Account
To set up your regular money account, you’ll start by selecting a mutual fund company to invest with. You’ll want to deal with a no-load company, with low expenses, that offers market index funds, and particularly an S&P 500 Index fund. The company that best meets our requirements is the Vanguard Group, which claims to have the lowest expenses in the industry.
When you’ve decided on a company you’ll contact them by 800 number and request information and an application to open an account, or you’ll contact them for this information at their website. The company will provide you with a prospectus of the fund you select, as required by law, and will tell you how to proceed. All companies will require a certain minimum initial transaction to open your account, after which they’ll accept small additional investments.
Typically, you may be required to make a minimum $3000 purchase to open your account, even though you’ll be able to buy as little as $100 any time thereafter. The mutual fund company wants to see that you’re serious, before going through the paperwork to open your account. Meeting this minimum may present a challenge to you if you plan to regularly invest, let’s say, $180 per month, but you’ll think of several ways to overcome this obstacle.
One solution would be to direct your $180 each month to a savings account at your bank until it builds to $3000 or more and then move it to the mutual fund. Another solution would be to open your account with the proceeds of your year-end bonus, or tax refund, or other windfall. Of course it may also be that you already have a savings account or money market account with more than $3000 in it that you can use for this purpose.
Besides doing the new account paperwork, and making your initial minimum transaction, you should also fill out a form for what is called an "AIP" (Automatic Investment Plan.) This is where you set things up for the mutual fund company to debit your bank account each month on some specific date and for some specified amount. You’ll be asked to provide your banking information and to decide on the regular dollar amount and the date.
You’ll also be asked to specify which of that company’s many mutual funds you wish to use as your investment. You’ll want to specify their S&P 500 Index fund, or their Total Stock Market Index fund, if they have one. Both of these funds are widely diversified and allow you to participate in the growth of our entire economy.
You’ll also want to specify that you want all dividends and capital gains distributions reinvested back into your fund. Otherwise you’ll receive small checks several times a year that you’ll just fritter away. If, instead, you tell them to reinvest, these seemingly insignificant amounts grow into fairly meaningful amounts as the months and years go by, and make a sizeable difference in your overall results.
Once your account is established, the fund will execute your initial transaction by purchasing as many full and fractional shares as possible of your designated fund, and depositing them to your fund account. You’ll then receive a confirmation of this transaction in the mail, showing how many new shares were bought, on what date, and at what price, and this process will be repeated every month.
At year-end you’ll receive appropriate tax documents showing dividends and capital gains credited to the account during the year, and if you made withdrawals (sales) during the year, you’ll also receive the 1099 information necessary for your taxes.
The mutual fund company “holds” your shares in an account at the fund. This means that instead of issuing a stock certificate and mailing it to you every time you make a purchase, they simply create a credit to your account at the fund, much as a bank would credit your deposits. The monthly statements and confirmations make it easy to keep track of your activity.
With a no-load company such as Vanguard, for example, there is no charge or commission for the purchase or sale of an S&P 500 Index fund. Every cent of your money is invested into the fund. The significance of this is that 100% of your money moves into and out of this fund without penalty of any sort except for market movement, and even market movement need not ordinarily be much of a concern.
Because an S&P 500 Index fund is not a “managed” fund, its annual expenses are usually among the very lowest in the industry. For example, in the case of Vanguard’s S&P 500 Index fund, these expenses amount to .18% (eighteen one-hundredths of one percent.) Portfolio turnover is also minimal in this fund because it simply mimics the S&P 500 Index. Not surprisingly, these investor benefits have made this fund the world’s biggest, most popular mutual fund, with assets of over $91 billion.
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