Step 2: Pick Your Provider

TO KEEP YOUR financial life simple, you’ll want to stash your investment dollars at just one or two financial companies. Which firms should you pick? Look for fund companies and brokerage firms that offer the investments you’re aiming to buy—and do so at a modest overall cost.

That immediately brings up a key decision: Do you plan to buy index mutual funds, exchange-traded index funds (ETFs) or some combination of the two? Index mutual funds are bought directly from the fund company involved, while ETFs are listed on the stock market and can be traded through any brokerage firm.

If you want index mutual funds, you have three main choices: Fidelity Investments, Charles Schwab and Vanguard Group. These are also the three choices if you’re planning to purchase a target-date index fund—discussed in step 4.

What if you prefer ETFs? Now, you could potentially use any financial firm with a discount brokerage arm. That means not only Fidelity, Schwab and Vanguard, but also places like Ally Invest, E*Trade, Interactive Brokers and Merrill Edge.

ETFs come in more flavors than index mutual funds, plus they have the potential to be marginally more tax-efficient. The downside: When you buy or sell an ETF, you’ll lose a little to the bid-ask spread, plus you could be charged a commission. This isn’t a big deal if you trade only occasionally. But if you’re regularly adding to your ETF portfolio, or selling from it, those trading costs could really add up. That’s why index mutual funds may be a better bet.

As you pick from among financial firms, keep in mind that it isn’t just about trading costs and index fund expenses. Also pay attention to other costs, such as account maintenance fees and the annual expenses on the firm’s money market funds. Many brokerage firms make much of their profit from the money market funds or other cash accounts that they offer.

What if you have no choice in financial firm—because you’re investing through your employer’s 401(k) or 403(b) plan? As you read the steps that follow, try to figure out which funds in your employer’s plan most closely resemble those described here. Because of the tax benefits and any matching employer contribution, you’ll almost always want to contribute to a 401(k) or 403(b). But that may, alas, mean buying actively managed funds and paying high annual fund expenses.

Next: Step 3: Cover Cash Needs

Previous: Step 1: Ask Why

Notify of
Inline Feedbacks
View all comments

Free Newsletter