I’ve been on an HSA+HDHP for a couple of years now and only realized recently the interest earned from investing HSA money is also tax free, so I want to start investing a part of my savings and see how it goes. I have 2 options, Betterment or Mutual Funds. I figured I’d try the latter to avoid fees, but I’m not sure which funds to choose. My HSA currently provides 30 fund options.
I see people mentioning Vanguard a lot so I spread out my initial investment into 25% chunks across 4 different Vanguard funds. How did I choose them? Well I literally just looked at the performance graphs and selected the ones that historically went up steadily without major dips. As a total noob, how can I improve my choices? Is there a simple way to decide without having to dive deep into the stock market?
A total market fund, or S&p 500 fund would be a good start. Pick something with a low percentage fee
100 percent this. Anything SP backed is gonna be safe. Unless you can do a CD, some have good rates of like 4-5 percent. T-bills tend to be too low yield for me tho.
Decimal fractions of a percent are low fee. Vanguard is mostly, if not completely, low fee.
To quantify it, anything under 0.20% is “low” to me, and many funds are <0.05%.
That said, once you get below a certain amount, comparing between “low” fees isn’t very interesting. For example, my 401k is switching their S&P 500 fund from a 0.04% fund to a 0.015% fund, which is >2.5x lower fees, but in terms of actual dollar amounts is pretty inconsequential (e.g. for $100k invested, it’s $25/year savings. At that point, I’m much more interested in the quality of the fund (i.e. how well it tracks its index) than the actual fees, since even a small amount of inefficiency (more cash, late rebalances, etc) can be much more impactful than that fee difference.
So anything under 0.50% is fine, and anything under 0.20% is “good,” and comparing expense ratios breaks down when the difference is <0.05%. At least that’s my take.
Thanks! Noob question - what is a “low percentage fee” in this context?
It’s the fee the fund manager charges. Looking at mine, they call them expense ratios. Big broad stuff like S&p and total market is typically low fee <1%. But something that tracks a specific market sector, or a really active fund could charge >5%
Gotcha. Thank you for the explanation!
Just to emphasize the importance of low expense ratios: you don’t just lose the money you pay to the fund manager. Over time you also lose what that money could have made if it had stayed invested. Even a modest retirement fund can have an opportunity cost of $50k by the time you retire. As another commenter said, Vanguard tends to have the lowest fees.