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This arrived in my inbox yesterday:

I was wondering what’s the best way to go about buying stocks? I have about $10,000 that I am willing to invest and right now during this melt down seems like a good time. I have never bought stocks before, do you have any good advice?

Well, since you asked…

Since you have never bought stocks before I would recommend against buying individual stocks. Instead, focus on investing in stocks via a good low-cost index fund or exchange-traded fund (ETF). Keep in mind that if you go the ETF route, you will have brokerage charges. For simplicity’s sake, I would just open an account at Vanguard and put half of your money in either the Vanguard Total Stock Market Index fund (VTSMX) or the Vanguard S&P 500 Index fund (VFINX) and half in the Vanguard Total International Index fund (VGTSX).

If you’re concerned that the market hasn’t yet bottomed, you could dollar-cost-average your way into the market by investing a portion of your money over several weeks or months—of course that’s up to you.

The main thing is to be sure you have the stomach to ride out this storm. It could be years before we return to normal. One thing you could do to help with volatility would be to put a portion of your portfolio in the Vanguard Total Bond Market Index fund (VBMFX). Just remember that Vanguard has a $3,000 minimum investment for all their funds and since you are only investing $10,000, you won’t have enough to meet the minimums on more than three different funds.

I hope this helps.

At the time of this writing, Vanguard’s S&P 500 Index Fund (VFINX) is down 14.04% year-to-date (not including dividends). Where would you be had you dollar-cost averaged into VFINX during the year? To arrive at that answer I assumed a few things:

1. Invested $500 on the 1st and 15th of each month.

2. If the 1st and the 15th fell on a weekend or holiday, I used the price for the trading day preceding the 1st or the 15th.

3. I assumed this was a 401(k) account.

So, here’s where you would stand right now had you invested $500 into VFINX on the 1st and 15th of every month during 2008:

So, you would have invested $7000 during the year and it’s worth $6,509. You’re down 7.01%, right? Not exactly.


Because you weren’t fully invested the entire year. In order to figure out your personal rate of return, you need to add in the purchase dates. The easiest way to do this is with Excel’s XIRR function. I ran the function myself. Here are the results:

So, according to those numbers, you’re personal rate of return is -22.68%, which is an annualized number. Sounds scary but keep in mind that it wouldn’t take much of a rise in the price of VFINX for that number to become positive. I was playing around with the numbers and figured out that if VFINX went up to $125, you would actually have a positive personal ROR even though the fund would still be down over 7.51% for year.

So, even though it stinks to watch your periodic investments drop in value, in the long run, it’s a good thing if you’re dollar-cost averaging.