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How to Buy Stocks/Bonds

by Tim Isbell, March 2013

I remember the first time I sat down to buy mutual funds from an investment company whose office was all the way across the country, and that I could only reach by phone and through their website. It was a bit intimidating to follow the online directions, write the checks, and drop them in the mailbox. If this is you, then this web page is for you. It provides the details on exactly how to get started. I’ll use Vanguard as the example, but the process is similar for other institutions.

Opening an account

Go to the Vanguard web page for personal investorsYou can research lots of investments without having a user id and password. Once there, just browse around for a few minutes. When you are ready to investigate opening an account, look in the lower left corner of this web page and click on Invest Now. Then follow the prompts. It takes about 15 minutes to set up a login and your first account. If you need help, just call the Vanguard number on the website. They are in the Eastern U.S. time zone, so call during regular business hours. Their customer service is superb.

The first thing to set up is a conventional personal investment account (taxable). If you have a trust, open a trust version. Later you can add retirement accounts.

The first investment to make in this account is a money market fund. Vanguard offers several. This fund will become your portal to move money in and out of Vanguard. A good one is the Vanguard Prime Money Market Fund (VMMXX), which requires $3,000 to open (but not to maintain). Fill out the forms to open and, if you can, put in $10,000 because the most stock or bond funds that you'll want require a $3,000 minimum. So with $10,000 in your money market fund you’ll have enough to buy shares in 3 mutual funds, and still have $1,000 left in your money market account. This way you can buy a domestic stock fund, an international stock fund, and a bond fund and immediately have some balance in your asset application.

Follow the Vanguard website directions on how to send a check - yes, right through the mail. Vanguard will tell you how to put your new account number on it, and even prompt you to print and fill out a form to send along with the check. Feel free to call customer service.

Eventually, you will want to set up an electronic connection between your Vanguard money market fund and an account at your regular bank(s). Then you can easily move money, without a fee, to and from Vanguard in the future.

If you're curious why I recommend Vanguard:

  • They have the lowest fees and management expenses in the industry.
  • They are huge and offer funds in all the areas you will need.
  • Their customer service is excellent.
  • Their educational offerings (blogs, articles, webinars) are excellent. For a great example of a comprehensive article, read Vanguard's Principles for Investing Success.

Buying stocks and bonds

A few days later when you login you can verify that your money is safely in your money market fund. Now you are ready to make some investments.

Some terminology

The word “Index” in the name of a fund identifies it as an index fund (as opposed to an actively managed fund). Index funds have inherently lower management fees as well as some other advantages. For more on this click on Glossary and look for Index funds. Whenever you can find an index fund that meets your asset allocation needs, it's probably the one to buy.

At Vanguard most funds, whether they are index funds or actively managed funds, are available in 2 classes. The Investor class has a low minimum investment and a low management fee. The Admiral class offers you a "volume discount." It requires a higher initial investment, but it provides an even lower management fee! When your Investor shares grow to the Admiral level, Vanguard automatically offers to convert them to Admiral. When you can afford it, buy Admiral shares.

Research some funds

Begin by checking out this URL that displays all the proprietary Vanguard Funds. Play with the checkboxes on the left side of the page, click on various fund names to see more detail. Try the comparison function where you can line up to 5 funds side-by-side. Within 20 minutes, you’ll get the feel. While Vanguard offers lots of funds from outside investment companies (which you can also purchase through this site), the ones in this particular URL are all in-house funds. There are enough of these to serve your needs for a very long time.

Now focus your research a little by looking for some funds to fill the specific categories in your asset allocation. I've listed some representative funds below just to give you places to start. Unless otherwise noted, each fund listed below has a minimum investment of $3,000:

Bond funds

The bond market is more complex and bigger than the stock market. Before you actually buy bond funds for the first time, you will want to read about them in the Glossary, and follow some of the links you'll find there. But now, just go ahead and browse the Vanguard URL to look a little deeper into a few of these bond funds. Such as: 

  • Total Bond Market Index Investor (VBMFX). Good foundation. It's a mixture of the whole domestic bond market. If you are limited to $3000 to cover the entire bond market, this is a reasonable candidate.
  • Intermediate-Term Investment Grade (VFICX). Corporate bonds.
  • Total International Bond Index Fund. Hedged against currency fluctuations. Should be available later in 2013.
  • Emerging Markets Government Bond Fund. Only buys debt denominated in U.S. dollars, so it is not exposed to currency fluctuations. Should be available later in 2013.

Large-cap stocks

Now do a bit of the same kind of research on some typical stock funds. Here are some suggestions to start with, organized (mostly) by category.
  • Total Stock Market Index (VTSMX). Good foundation. A balanced fund that holds all kinds/levels of domestic stocks. If you only have $3000 to cover the whole stock market, this is a reasonable candidate.
  • 500 Index Investor (VFINX). Another good foundation. The is the classic Vanguard large-cap fund; it tracks the S&P 500.
  • Dividend Growth Fund (VDIGX). Essentially a large-cap value stock fund.
  • Value Index (VIVAX) (This is a change from the original post. This is an index fund, the other was not.)

Small-cap stocks

  • Small Cap Index (NAESX)

International stocks

  • Total International Stock Index (VGTSX). Mixture of the whole international stock market. If you only have $3000 to cover the whole International stock market, this is a reasonable candidate.
  • Emerging Markets Stock Index (VEIEX).

Alternate investments

  • REIT Index (VGSIX). This is a Real Estate Limited Trust. You could categorize this as a large cap stock fund, or perhaps as an Alternative.

Now you know enough to make some purchases.

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All the best,

Tim Isbell

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