How do I make this type of investment?

In My Humble Opinion
1

I have more money than I need to remain liquid, sitting around in a bank account doing basically nothing. I would like to invest this money. Specifically, I would like to invest it in a minimal-fee mutual fund.

Everywhere I look to try to make investments always talks about how well their funds are managed by experts. This means that, if I were to invest in these places, some portion of my gains would go to paying the salaries of these experts. But both theory and experiment prove that “experts” cannot, on average, improve the value of investments. Sure, over any given time period, some “experts” will do better than others, but that’s uncorrelated with how well they’ll do in any other time period.

So, I want to avoid that. I want to buy some sort of investment instrument that is not actively managed by “experts”. Where do I go to buy such a thing?

2

Look at ETFs or index funds.

3

Index funds. The Vanguard Group pioneered them and is still one of the largest and best known index-fund companies, but a fair number of companies offer them these days.
And now I feel like the guy at a cocktail party saying “Plastics”.

4

I assume that you mean you want to invest in stocks? The simplest and cheapest (lowest ongoing fees, lowest transaction costs to buy/sell) way to achieve what you are looking for is to use ETFs rather than mutual funds. ETFs trade continuously all day, when you buy or sell an ETF the transaction works just the same as buying shares in a single stock. But, like a mutual fund, an ETF tracks the value of a large portfolio of stocks. There is an arbitrage mechanism, the details of which are unimportant, that ensure that the value can never deviate significantly from the underlying stock portfolio. The dividends from the underlying portfolio are passed on to you quarterly or semi-annually.

You want a “passive” (as opposed to actively-managed) index-tracking ETF. The two biggest managers are Vanguard and iShares (Blackrock), and there’s no need to look beyond these two. If you just want U.S. market exposure, they have ETFs that track the entire stock market - with one holding, you will effectively own every stock in the U.S., in proportion to its market capitalization.
VTI from Vanguard
https://investor.vanguard.com/etf/profile/VTI
ITOT from iShares

If you already have a brokerage account, you can buy them in there. If you don’t, and you don’t want one, you could set up an account directly with Vanguard, although you’d be limited to just the universe of Vanguard products.

5

[cont from above]
VTI and ITOT essentially identical funds. They are both highly liquid, trading constantly very actively, so even in times of market disruption your transactions costs (bid-ask spread) will be negligible. Their ongoing fees are de minimus, 0.03% per year.

If you want international stock market exposure, I’d suggest adding from the following, which are again huge highly-liquid funds with very low costs that passive track a portfolio of every single stock in the market:

Developed markets outside the U.S.:
VEA from Vanguard
IEFA from iShares

Emerging Markets:
VWO from Vanguard
IEMG from iShares

Vanguard ETF list:
https://investor.vanguard.com/etf/list#/etf/asset-class/month-end-returns
iShares ETF list, stick to their “Core” ETFs:

6

I agree with the recommendation to invest with Vanguard. A related question that you didn’t ask is what to invest in. You might read this page on the “three fund portfolio”.

7

Thanks, everyone, I knew there had to be a simple answer, but none of the professional pages want to make that simple answer very easy to find.

8

Vanguard is your place. Total stock market index should be a good fit depending on your age and emotional ability to ignore ups and downs. Bogleheads.org is an excellent resource. I’d keep the investing simple since I believe time in the market is the key component to success.

9

Maybe they didn’t used to, but Vanguard now lets you buy non-Vanguard funds.

10

Also, after you’ve set up your initial investments and left them to do well or not, check out a discount brokerage like Schwab. I’ve got a CFP there that’s made me a shit-ton of money over 15 years. I do have a variety of Vanguard funds in my retirement portfolio, but that’s for pre-tax money.

11

OK, I’ve gone through (most of) the steps to create a Vanguard account, but it never asked me what sort of fund I wanted, and it appears to have defaulted to a money-market fund, not an index fund. How do I change that?

12

You don’t. The money-market fund is your “settlement fund”, which Vanguard defines as “A money market mutual fund that holds the money you use to buy securities, as well as the proceeds whenever you sell.” In other words, it’s where you park the money before you invest and where you park the money after you sell an investment. It also holds any dividends that you don’t reinvest.

13

It’s worth noting that even if you have money that you do need to remain liquid, you can still invest it in mutual funds at a place like Vanguard. You can redeem any funds from Vanguard any time and have the funds within a couple of days.

That said, if you do that, then Vanguard will not allow you to put the money back into that fund for some amount of time (I forget if it’s a month or two months). They do this to discourage short term market timing. So you don’t want to put your last dollar into these funds. But if you have something like a “rainy day fund” or like to keep “six months of cash in liquid investments” then these funds are liquid enough for such purposes.

14

So the next step is to log into your account, and then select the ‘Buy and sell’ tab. From this tab you can then buy the mutual funds you want. If you have already transferred funds into the settlement account, you can use this money to buy the mutual funds. Otherwise you can use money from a bank account to buy the funds.

I just noted that I have two account types at Vanguard, a regular Vanguard account which allows me to buy and sell Vanguard funds, and a Vanguard Brokerage account that allows me to buy and sell Vanguard funds, stocks and securities, ETFs, and non-Vanguard funds. So if you want to buy ETFs or non-Vanguard funds, you’ll probably need to request a brokerage account if you don’t have one.

15

Ah, OK, that makes sense, then. It’d be nice if they had spelled that out a little more clearly.

16

Vanguard is in the process of transitioning all current accounts to Brokerage accounts, so I expect that any new account created is going to be a brokerage account.

Chronos, one of the things to look at for funds is the Expense Ratio. It’s the annual cost (as a percentage of assets) that the fund takes to run. Passive funds generally have ERs that are 0.2% or lower. Active funds generally have ERs that are 1%+ (sometimes way-plus). The extra fees go to pay the expert managers (and other increased transaction costs).

17

I recently had my SIMPLE IRA through work transferred to Vanguard, and because it was at least 2 years old I could roll it into a regular IRA no problem. I apparently am able to buy a very wide variety of things in that IRA, not just Vanguard stuff, so I assume that will also be the case for taxable brokerage accounts. It is not true for the SIMPLE IRA account though; I don’t know what the exact restrictions are, but the guy at Vanguard managed to convince me to roll over the funds into another IRA instead of just transferring them because I would have more options to invest in, and obviously at no additional cost.

I have the bulk of my investments at Schwab, but Schwab doesn’t offer individual SIMPLE IRA accounts - the entire plan has to be through them, and my employer was unwilling to go that far even if he was willing to let me set up a separate account for my funds with a broker. I don’t know if I just am used to Schwab’s interface more, but it seems much better than Vanguard’s. It’s a lot more clear what is what and how you do certain things. It looks exactly like a modern website should, while Vanguard’s looks like the SDMB. Schwab’s offering of no-transaction-fee funds is slightly worse than Vanguard’s but not appreciably, and the expense ratios are similarly negligible for those that follow big indices. They also seem to have a lot more research available on individual stocks, presumably because Vanguard has only recently transitioned to offer full brokerage accounts and not just direct investments in their proprietary funds. Most of that available research is “open source” so-to-say - it’s just condensing what numerous others have published for recommendations. I have a small side account at M1 making a few trades every pay period based on certain aspects of Schwab’s research tools, as they allow trading of any domestic stock on the market at no commission with $1 minimums and maximum 100 positions. Schwab has gone to no commission on stock trades as well, but had 1 share minimums until recently and the only recent change is that you can buy “slices” of minimum $5 in up to 10 different companies, and only S&P 500 companies for now. M1 also offers “automated” investing, with it automatically calculating how much of each position new money buys based on maintaining each position near a set percentage of your account, plus offers the ability to manually buy any amount of any position outside of the automated rebalancing - useful when they fail to invest all my money because of that $1 minimum and I’m left with several dollars uninvested after a block of buys with new money because a bunch of them calculated to be less than $1. M1 also offers ETFs the same way, since they’re traded just like stocks, and being able to buy fractional amounts of ETFs is sorta nice, even if I don’t take advantage of it.

As to ETFs vs. mutual funds, I have a strong dislike for ETFs for two reasons. One, while there is an arbitrage mechanism that keeps the price of the fund near its NAV, there’s no guarantee that it will be centered when you go to buy. Two, it almost certainly will be more expensive than the NAV to buy and less expensive when you sell because of the bid/ask spread. It might not be much, but there is no bid/ask spread on mutual funds. All mutual fund transactions occur at the end of the day after market close, and buys and sells use the same price. I don’t ascribe any value to being able to buy ETFs in the middle of the day because I’m, well, working. As a long-term investor, I have no problem taking the end-of-day price. The one advantage of ETFs that I haven’t mentioned that might eventually cause me to move over into their camp (possibly at M1 where I can buy fractional shares) is that of tax efficiently. Due to the structure of ETFs, they generally do not distribute capital gains, so there’s less of a tax burden holding them in taxable accounts. This is because when they need to change what stocks they hold, they are (at least, from what I understand) able to do a trade with one of those large institutional investors that maintains the lack of arbitrage, trading their whole block of stock they want to get rid of for another they want to start holding, and for some reason this isn’t a taxable event, for the same reason presumably that the general trades of the institutional investors of large blocks of the individual stocks making up the ETF for large blocks of the ETF that gets traded on the exchange are not taxable events either, and are what drives the lack of arbitrage. This makes ETFs that hold the same stocks as a mutual fund a bit more tax efficient. However, I’m currently in the 0% capital gains bracket, and probably will be for at least a few more years. I’ll gladly take the 4.25% Michigan tax and 0% federal tax now rather than the 15% federal tax if I have to defer the gains until later. Now, one might say that even the 4.25% that’s not being reinvested will eventually win out over the 15% tax rate given that my main goal is saving for retirement and I’m not likely to sell my funds any time soon. That’s a reasonable point, but I have a feeling at some point in the next decade my taxable account will be (somewhat) liquidated to provide the down payment on a dwelling unit for myself. I just don’t know when, so I assume I’m just saving for retirement, and that liquidation event will surely occur in a year where I’m in the 15% capital gains bracket. Also, this tax advantage of ETFs is of no use in an IRA, where about half my money is anyway, and I’ll take the lack of bid/ask spread over the advantage of being able to buy and sell mid-day…