Vanguard STAR Mutual Fund (VGSTX) – An Option for the Investing Rookie

December 3, 2006

An article today at The Simple Dollar talked about getting started investing with Vanguard mutual funds.

We have our Roth IRA’s in a variety of Vanguard index funds. We chose Vanguard for the same reasons that Trent lists: low expenses, good selection of index funds, and great company reputation.

Account Minimums
One thing that I found challenging when getting started investing was coming up with the account minimums that are required by various financial institutions. As part of their strategy of keeping their expenses low, Vanguard raised their account minimums for IRA’s from $1000 to $3000 about a year ago. The reasoning was that accounts with very low balances cost them the same to maintain as very large accounts.

By raising the minimums for an IRA investment, Vanguard did reduce their expenses but they also priced those that are just getting started out of the market. I called Vanguard the other day, inquiring about options for a family member that is looking to open a Roth IRA and was pleased to find they do still offer one fund for beginners.

Vanguard’s Answer
The Vanguard STAR Mutual Fund has an initial minimum investment of $1000, and minimum additional investments of $100. With an expense ratio of 0.36% and decent 1 year (8.67%), 3 year (11.35%), 5 year (8.59%), and 10 year (9.29%) returns this seems to be a good option for someone just opening an investment account without a lot of capital.

As of 10/31/2006, the asset allocation of the fund is 12.6% short-term reserves, 25.20% Bonds, and 62.20% Stocks. This may be more of a conservative approach than investors with a long time horizon are looking for. However, after their Star Fund investment has grown to $3000 they can move that amount into another Vanguard fund of their choice.

I’m still researching the best choice for a good entry level investment vehicle so if anyone has any other suggestions please let me know.

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Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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Comments

9 Responses to Vanguard STAR Mutual Fund (VGSTX) – An Option for the Investing Rookie

  • Matt Wilson

    You can also invest in target retirement funds (ex: 2055) for a $1000 minimum. As usual, the later the date of the fund, the less conservative the investments. This is what I plan to use once my emergency fund is in place, rather than the conservative star fund.

  • samuelDean

    Where can I get the Prospectus on Vanguard Star Fund.
    Web address would be great.

  • moneysmartz

    CreditShack, thanks for the tip on T. Rowe Price

    Luke, mabye BOA has a special deal with Vanguard. I’ll have to keep that in mind, thanks.

  • Luke

    I have my Roth through Bank of America and their brokerage arm. For some reason, I am allowed to buy ANY Vanguard fund for $1000, NOT the $3000 intial minimum investment. I can’t be alone on this, can I?

  • CreditShack

    Small investors can open a Roth IRA with only a $50 minimum at T. Rowe Price, provided that they commit to contributing at least $50 a month to their IRA until the regular account minimum is met ($2,500). All low balance fees are waived under this automatic investment plan. T. Rowe Price’s domestic index funds cost about 0.40% annually.

    Although the expense ratio at T. Rowe Price is higher than Vanguard, the effective rate for T. Rowe Price is lower when you consider Vanguard’s small account fees.

    Once the account reaches $5,000 (the balance point where Vanguard no longer charges fees of any sort for non-index funds held in IRAs), small investors can move the account to Vanguard. Vanguard’s Target Retirement funds, which hold a mix of index funds, are not treated as index funds. (Their index funds carry a $10 annual fee for balances under $10,000.)

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