[manasecret]

I took the plunge with Vanguard. I read much advice from many different sources that said getting started with a Roth ASAP is the most important thing. Waiting around trying to find the perfect provider or perfect funds just keeps me from investing now, which is bad mainly because of how compound interest works.

So I opened a Roth IRA with Vanguard and bought their STAR fund, which had the smallest minimum investment. I will move that over to more aggressive funds when I get more cash in.

Now my question is where all the money comes from with compound interest. I mean, I know how compound interest works. You put in a certain starting amount of money (the principal), say $1000. Then any interest that you earn on the principal , say 5% over one month which would be $50, gets compounded into the principal for the next period. So for the next period, you would be gaining 5% interest on $1050 and not $1000. And then the next month you would earn 5% on 1102.50, and at the end of one year you would be earning 5% on $1795.86, and at the end of 10 years it would be worth $348,912. And in that way, the initial investment grows exponentially.

So I understand that; I know how it works. (And I know that 5% growth per month is ludicrous.) But where does all that exponential growth money come from? I know if I took out a loan and was charged compound interest on the loan, they get all the exponential growth money out of my pocket. But when I invest in a mutual fund, whose pocket does all that money come out of?

Originally Posted by Professor S

Stick funds are called equities, becauase you are purchasing equity in the companies by purchasing stocks.

Normally different houses have funds that are diversified, but diversified within the stock market, and each fund may do better or worse than one another. I can't speak on what funds within equities are better than another.

An index fund is one that is VERY diversified in the stock market. Basically, in an index fund you buy a little of every stock on the market, so you go as the market goes, percentage for percentage.

Personally, I don't like them because they are just as risky as other more carefully managed equity funds, and they bring 2% less on the whole, averaging only about 6% a year in the long term last time I checked.

Hmm I guess I'll have to more research to figure out what the best funds are. I guess the idea of index funds is getting the semi-aggressive growth without having to worry about which funds to choose.

I don't invest ay all in stable funds. All my money goes straight into aggressive, because the odds that I will ever realize the loss we are experiencing right now are very low due to my age (31) since I'm not planning to retire until 60 or so.

None? Hmm, I guess with a 401k you can't take out any of the money (even the money you put in) without penalty, right? Which would make a Roth a bit different. In case I ever need to pull some of the contributions out, I guess it might make sense to invest some in stable funds. The advice I've read points to putting some percentage in stable funds.

Bingo, n that case you should push retirement back a few years until the market is hot, and then cash out when the time is right so you realize the entirety of your investment.

Of course I'm worried, but not much. Even during the great depression the markets bounced back, and on a percentage basis over the last 40 years the booms have been astronomical while the recessions have been small in comparison. To give an example, we have lost almost 50% of the stock market's value, but thats from a 300% or so high from the last down market. Boom times are also far longer than recessions over the last 40 or so years.

I remember back when 9/11 happened, people said the DOW would never be above 10,000 again. Like all financial naysayers in history, they were wrong.

Well that's reassuring.

I never pick stocks, I let the pros do that. I pick over funds, and only aggessive/equity funds and I make sure I have a good investment house. Right now I have John Hancock running my portfolio, and they have averaged higher than most houses when the market was good.

And when the market was bad?

While I have gleaned some info over the years, please talk to a professional about your plans, as I have dedicated my investing at the moment in my 401k and in Real Estate (my house), and I am a layman in both categories.

I'm not sure where or who to turn to when finding a professional.