Indexing on a Shoestring

A manager's decisions are one reason some S&P 500 funds do better than others, and that's where a fund's past performance compared to the benchmark is a good guide. But Carlson stresses that for the limited-cash investor, low fees are essential. In fact, variations in fees are the the other big reason similar index funds post different returns.

As for which major index to choose, Carlson says it depends on your other holdings. "If your 401(k) is in aggressive funds, then you might want a sedate index like the Dow or the S&P," he explained.

Carlson also likes the potential of an "enhanced index fund" like the fund he manages to outperform the benchmark, because the manager can put more cash into those stocks that look better than others. See our article on enhanced index funds for more information.

While the $50 plan may sound nice, can investors really achieve serious goals with just a $50 commitment? "Absolutely," says Carlson, author of "The Individual Investor Revolution."

"Yes, I think they can in two ways," Carlson explains. "If you start early enough, even if that's all you ever do, that can turn into a nice chunk of money. A 22-year-old who starts investing 50 dollars a month will have $319,000 by age 65, assuming a 10% annual return. If that investor waits until age 32, it would have to be $150 a month to get there."

"But the real power of this: people start to see the fruits of it. They start to get rid of their 17 cable channels, and it becomes $75 a month, then $100," Carlson explains. "The whole investing process becomes very infectious. That's how $50 a month makes you rich."

Index funds, in particular, offer "a low-impact way to get going, especially if you're not comfortable making investment decisions," Carlson says.

Not only do index funds often outperform actively managed funds, but they also present beginners and small investors with two important plus points. They're "low-cost and very tax-friendly," he adds. "Those are legitimately powerful tools."

		Indexing on a Shoestring: What's Out There for $50 a Month Page 3 A manager's decisions are one reason some S&P 500 funds do better than others, and that's where a fund's past performance compared to the benchmark is a good guide. But Carlson stresses that for the limited-cash investor, low fees are essential. In fact, variations in fees are the the other big reason similar index funds post different returns. As for which major index to choose, Carlson says it depends on your other holdings. "If your 401(k) is in aggressive funds, then you might want a sedate index like the Dow or the S&P," he explained. Carlson also likes the potential of an "enhanced index fund" like the fund he manages to outperform the benchmark, because the manager can put more cash into those stocks that look better than others. See our article on enhanced index funds for more information. While the $50 plan may sound nice, can investors really achieve serious goals with just a $50 commitment? "Absolutely," says Carlson, author of "The Individual Investor Revolution." "Yes, I think they can in two ways," Carlson explains. "If you start early enough, even if that's all you ever do, that can turn into a nice chunk of money. A 22-year-old who starts investing 50 dollars a month will have $319,000 by age 65, assuming a 10% annual return. If that investor waits until age 32, it would have to be $150 a month to get there." "But the real power of this: people start to see the fruits of it. They start to get rid of their 17 cable channels, and it becomes $75 a month, then $100," Carlson explains. "The whole investing process becomes very infectious. That's how $50 a month makes you rich." Index funds, in particular, offer "a low-impact way to get going, especially if you're not comfortable making investment decisions," Carlson says. Not only do index funds often outperform actively managed funds, but they also present beginners and small investors with two important plus points. They're "low-cost and very tax-friendly," he adds. "Those are legitimately powerful tools." 07/06/00 <<Previous Printer Friendly Page