Expert: Paul Henneman - 1/10/2008

Question
Hi, I am 17 years old and I would like like to invest a few thousand dollars in an index fund(s). I would like to leave out the middle man and do everything myself but I don't really know where to start. Can you give me some advice? Thanks,

alex

Answer
Alex,
   Thank you for your question! I completely agree, no need for a middle man to invest in an index fund. Best to have direct control over it, and keep the trading costs down.
   It is fairly simple to do this. You will need to set up an account with an online brokerage service. Some of the most popular ones that have low fees are www.ETrade.com, www.TDAmeritrade.com, and www.Scottrade.com   There is another I will mention that has even lower trading costs, although it is a much smaller company: www.FOLIOfn.com
   The process will be much like opening a bank account. Go to the websites, review their services, and once you select which one you want to use, follow their instructions to set up an account. Once the account is set up, you will need to fund it. This can be done by mailing in a check, or setting up an EFT (Electronic Fund Transfer). After your funds are deposited in your new trading account, you will be able to buy and sell just about any stock or mutual fund. The index fund you are interested in will have a ticker symbol, that is usually all you need to place the trade.
    There is one additional thing I would suggest. If this is to serve as a retirement account for you, and you do not plan to withdraw the funds until later in life, you will want to consider setting up the account as an IRA or ROTH IRA account. These are retirement accounts that offer significant tax advantages. If you set this up as a standard individual trading account, you will have to pay taxes on the profits that your fund makes each year. I strongly urge you to investigate this, here is a link to a website that describes both an IRA and ROTH IRA account:
http://www.investopedia.com/terms/i/ira.asp

Make sure you understand the details, because there is a limit to how much you can invest in an IRA or ROTH IRA each year, and some differences on if you can tax a tax deduction for the amount you contribute each year between those two types of accounts. But, as the decades pass, the tax advantages will become significant.
Another good source is the book "Investing for Dummies". This book outlines both ROTH and standard IRA's, along with most other major forms of investment.

I hope that this helps gets you started! I congratulate you on thinking about this so early. With so much time ahead of you for your investments to grow, with even a minimal investment you will have a very satisfying financial situation in the coming decades. Keep in mind that interests compounds over time, so the longer your investments have to grow, the better off you will be.

Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com