Investing Primer: Tax Efficiency

“In this world nothing can be said to be certain, except death and taxes.” 

                                                                 - Benjamin Franklin

This is the sixth post in my investing series: 

Part 1: save, save, save
Part 2: stocks and bonds
Part 3: risk, asset allocation, diversification
Part 4: mutual funds and ETFs

Part 5: minimizing costs

Some investments are more tax efficient than others, which means you have less tax to pay.  And the less taxes you pay, the more money you get to keep.  Armed with this information, you can organize your investment portfolio in a way that minimizes taxes.

Tax Advantaged Accounts  

Many investors saving for retirement should start by contributing to tax advantaged accounts such as 401ks and IRAs.  These tax-advantaged accounts allow your investments to compound and grow without taxes taken out each year.  For 2013, if you're under 50, you can contribute a maximum of $5,500 in your Traditional or Roth IRA and $17,500 in your 401k or 403b accounts.  That’s $23,000 in tax advantaged investments per year!

Investing Primer: minimizing costs

This is the fifth post in my investing series: 

Part 1: save, save, save
Part 2: stocks and bonds
Part 3: risk, asset allocation, diversification
Part 4: mutual funds and ETFs

Today I will talk about minimizing costs when investing.   

Expense Ratios

Every fund has management fees, which are used by the investment firm for daily operation of the fund.  These fees are called expense ratios, and they represent a percentage of the assets in your fund. 

Let's say your fund has an expense ratio of 0.5%.  This means that 0.5% of your fund's total assets will be used by your investment firm to cover their expenses.  The expense ratio lowers your return because it is taken out of your fund's assets.  For every $10,000 you have invested, the firm is keeping $50.  This may not sound like a lot, but the costs really add up over time. 

This figure shows that if you choose a fund with an expense ratio that is 1% less than a more expensive fund that performs the same, you can save up to several hundred thousand dollars over a 30 year period of compounding.  1% in extra fees may reduce your available retirement funds by 10 years.

Investing Primer: mutual funds and ETFs

This is the fourth post in my investing series.  You can find my other posts on investing here:

Part 1: save, save, save
Part 2: stocks and bonds
Part 3: risk, asset allocation, diversification

Today I will be talking about mutual funds and exchange traded funds (ETFs). 

Vanguard Total Stock Market Index Fund (VTSMX)

Mutual Funds
Mutual funds pool money from many investors to buy securities, which can be stocks, bonds, real estate, and other investments.  When you buy a share of a mutual fund, you actually own a small fractional component of the underlying pool of securities within the fund.  Each mutual fund has a fund manager who chooses which stocks or bonds to purchase. 

You must purchase a mutual fund during a market trading day between trading hours.  The New York stock exchange runs Monday through Friday 9:30am to 4:00pm ET and observes most major holidays.  When you purchase a mutual fund, your order does not get fulfilled until the end of the trading day.  This is because stocks and bonds can be bought and sold throughout the day with continuously changing prices.  The net asset value (NAV), or price of the mutual fund, is not determined until after the market trading day closes.  The NAV is the average price per share of all the stocks or bonds within the fund.