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Hello all,
I understand how compounding interest works, I'm just not sure how to execute a plan. I have set up a direct deposit weekly into my investment account (TD ameritrade), but i'm not sure where to go from there. Should i be automatically investing this into a particular index to get the most out of compounding interest? Or just using the investment account as a savings account? What the hell am i missing? I'm new. Just trying to learn at this moment.
You need to be invested in something that pays interest, a dividend, or some other regular distribution. That can be a stock, an ETF (exchange traded fund) or a mutual fund. Any of those will do. But the important thing is to turn on automatic reinvestment of dividends (or interest). It is the reinvestment that compounds. Most brokerage accounts have a way to do this.
As to what to invest in - that is the source of endless debates. I would find a cheap (like around 0.10% or less) broad or balanced fund and put all your money in it. The key here is to not watch it at all as you will get tempted to sell it when the market crashes (which it will, many times, over your life) and just stay the course. After about 25, 30 years take a look at it and you will be amazed how it has grown.
Vanguard has cheap funds. VASGX might be a good one for you. It is balanced and is the only one you will need.
You need to be invested in something that pays interest, a dividend, or some other regular distribution. That can be a stock, an ETF (exchange traded fund) or a mutual fund. Any of those will do. But the important thing is to turn on automatic reinvestment of dividends (or interest). It is the reinvestment that compounds. Most brokerage accounts have a way to do this.
As to what to invest in - that is the source of endless debates. I would find a cheap (like around 0.10% or less) broad or balanced fund and put all your money in it. The key here is to not watch it at all as you will get tempted to sell it when the market crashes (which it will, many times, over your life) and just stay the course. After about 25, 30 years take a look at it and you will be amazed how it has grown.
Vanguard has cheap funds. VASGX might be a good one for you. It is balanced and is the only one you will need.
Wow. Thank you for that. Definitely cleared it up for me. Currently I have about 10k invested in Amazon. No dividends here. Would it be wise to sell Amazon and buy a mutual fund or ETF? Or keep amazon and slowly buy into another fund with other money. Everywhere I read says to invest a set amount of your earned income into your investment account. 10% for example. Do they mean automatically put 10% into the fund you are invested in? Not sure how to do that with TD ameritrade. I'm sure one of their people would help set that up.
Anytime you have so much in one stock you are carrying risk. Buying the VASGX or Vanguard Lifestrategy Growth Fund is not a low cost index fund with expenses below .10 but it's still cheap and spreads the risk.
You need to be invested in something that pays interest, a dividend, or some other regular distribution. That can be a stock, an ETF (exchange traded fund) or a mutual fund. Any of those will do. But the important thing is to turn on automatic reinvestment of dividends (or interest). It is the reinvestment that compounds.
Compounding occurs on the total amount of $ invested, whether the fund pays dividends or not. Many funds paying little to no dividends compound more than higher dividend-paying funds, so dividends should not be your main concern, total return should.
If you have an acct with TDAmeritrade, you should have the option to enroll in commission-free ETF's. In that list of commission free ETF's are a number of excellent vangaurd index fund ETF's. If you want to "set it and forget it" then select an appropriate group of those and set them to autoreinvent the dividends.
Then, monthly, quarterly, annually (or whatever timeline suits your needs) you can take the cash you've accumulated through direct deposit and make new purchases of these ETF's.
But looking for "a particular index to get the most out of compounding interest" needs to be tempered with your age/risk tolerance. VTI is the Vanguard Total Stock Market index. That might be a good place to start assuming you aren't near retirement age.
If you have an acct with TDAmeritrade, you should have the option to enroll in commission-free ETF's. In that list of commission free ETF's are a number of excellent vangaurd index fund ETF's. If you want to "set it and forget it" then select an appropriate group of those and set them to autoreinvent the dividends.
Then, monthly, quarterly, annually (or whatever timeline suits your needs) you can take the cash you've accumulated through direct deposit and make new purchases of these ETF's.
But looking for "a particular index to get the most out of compounding interest" needs to be tempered with your age/risk tolerance. VTI is the Vanguard Total Stock Market index. That might be a good place to start assuming you aren't near retirement age.
I am with TDAmeritrade. Thats great. I will definitely look into that. I am only 28, have been investing since I was around 23ish. Thank you for your help!
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