I’ve been on an HSA+HDHP for a couple of years now and only realized recently the interest earned from investing HSA money is also tax free, so I want to start investing a part of my savings and see how it goes. I have 2 options, Betterment or Mutual Funds. I figured I’d try the latter to avoid fees, but I’m not sure which funds to choose. My HSA currently provides 30 fund options.
I see people mentioning Vanguard a lot so I spread out my initial investment into 25% chunks across 4 different Vanguard funds. How did I choose them? Well I literally just looked at the performance graphs and selected the ones that historically went up steadily without major dips. As a total noob, how can I improve my choices? Is there a simple way to decide without having to dive deep into the stock market?
A total market fund, or S&p 500 fund would be a good start. Pick something with a low percentage fee
Decimal fractions of a percent are low fee. Vanguard is mostly, if not completely, low fee.
To quantify it, anything under 0.20% is “low” to me, and many funds are <0.05%.
That said, once you get below a certain amount, comparing between “low” fees isn’t very interesting. For example, my 401k is switching their S&P 500 fund from a 0.04% fund to a 0.015% fund, which is >2.5x lower fees, but in terms of actual dollar amounts is pretty inconsequential (e.g. for $100k invested, it’s $25/year savings. At that point, I’m much more interested in the quality of the fund (i.e. how well it tracks its index) than the actual fees, since even a small amount of inefficiency (more cash, late rebalances, etc) can be much more impactful than that fee difference.
So anything under 0.50% is fine, and anything under 0.20% is “good,” and comparing expense ratios breaks down when the difference is <0.05%. At least that’s my take.
Thanks! Noob question - what is a “low percentage fee” in this context?
It’s the fee the fund manager charges. Looking at mine, they call them expense ratios. Big broad stuff like S&p and total market is typically low fee <1%. But something that tracks a specific market sector, or a really active fund could charge >5%
Gotcha. Thank you for the explanation!
Just to emphasize the importance of low expense ratios: you don’t just lose the money you pay to the fund manager. Over time you also lose what that money could have made if it had stayed invested. Even a modest retirement fund can have an opportunity cost of $50k by the time you retire. As another commenter said, Vanguard tends to have the lowest fees.
100 percent this. Anything SP backed is gonna be safe. Unless you can do a CD, some have good rates of like 4-5 percent. T-bills tend to be too low yield for me tho.
Never say safe, especially with the S&P it is a risk and people should understand that, but for most people who predict being able to hold for a long period it works.