This is the strong stomach approach: You save up to the minimum initial investment of a broad-based stock index fund, and then invest the entire amount in it.
| Advantages | Disadvantages |
| Starting with a core and building around it minimizes the tax consequences for taxable savings—instead of selling fund shares that no longer meet your needs and upon which you may have taxable gains, you are simply buying and holding, and adding. | The disadvantage, of course, is that you are fully exposed to the stock market. But since you are just starting out, you most likely have a very long-term time frame (possibly over 30 years) and can afford to take on substantial stock market risk. |
The index fund serves as the core of your overall portfolio as you start to build toward your investment plan. It will be the most conservative portion of your stock market commitment, composed primarily of large capitalization stocks; when you add on, you will be adding on more aggressive commitments—small stocks and international, for instance.
Using an index fund gives you exposure to the stock market, but takes out "manager risk"—the risk that the active investment decisions made by a portfolio manager will cause the fund to deviate substantially from the overall market. For investment newcomers, this makes the mutual fund selection less daunting.
However, you do need to focus on an appropriate index. Since the fund will be your core stock holdings, you should select one that targets a large-cap stock market index, such as the Standard & Poor's 500 or a broader index that still encompasses large-cap stocks, such as the Wilshire 5000. In addition, you should make sure that the fund you select adequately follows the targeted index.
If you are going to use this approach, you first need to reconsider your risk tolerance and see if you can stomach starting out with a full commitment to stocks using a broad-based index fund. You also need to make sure that you will not need any portion of this investment for liquidity needs.
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