Sellers of lottery tickets suggest all you need is a dollar
and a dream. If you want a decent shot at making money, you’ll need at least
$50—and a few carefully chosen mutual funds. Here are top five suggestions for
those without much money:
Your employer’s plan:
Many 401(k) and 403(b) plans, especially those offered by large employers,
include a select list of low-cost mutual funds. That makes it relatively easy
for employees to build sensible portfolios. On top of that, there’s no required
minimum investment. Got younger colleagues or children in their 20s? Prod them
to sign up for their employer’s plan.
Vanguard’s target
funds: Target-date retirement funds, which offer diversified
portfolios geared to folks retiring at or close to the year indicated in each
fund’s name, have been criticized as cookie-cutter solutions that are either
too risky or not risky enough.
Vanguard Group’s target-date funds are a great choice for
most investors, who would struggle to put together anything better on their own
or working with a financial adviser. Vanguard Group’s target-date funds charge
average annual expenses of just 0.17%, or 17 cents a year for every $100
invested, and have a $1,000 minimum. Each fund owns a mix of market-tracking
stock- and bond-index funds. That mix becomes more conservative as a fund
approaches its target date.
Schwab’s index funds: Charles
Schwab offers five conventional stock-index mutual funds and three bond-index
funds, all with $100 minimums. Its U.S. total stock-market fund charges a slim
0.09%, its international-index fund levies 0.19% and its total bond-market fund
costs 0.29%. All three funds would make good core portfolio holdings.
Exchange-traded
funds: Instead of buying index-mutual funds, you could open a
brokerage account and purchase exchange-traded index funds. Both types of funds
seek to track the performance of an underlying market index. ETFs, however, are
listed on the stock market and can be traded anytime the market is open, while
mutual funds can be bought and sold just once a day, at the market close.
Merrill Edge, ShareBuilder, TD Ameritrade and TradeKing
have no required minimum to open a brokerage account, while E*Trade will
let you start an account with $500. Schwab requires $1,000, but it will waive
that minimum if you add $100 a month to your account.
Some brokerage firms let you trade certain ETFs without
paying a commission. That’s attractive. But before buying, check that a fund’s
annual expenses are low, preferably below 0.2%. As a rule, ETFs should have
lower fees than comparable mutual funds, because they don’t incur the cost of
handling shareholder accounts; that’s done by brokerage firms. You might start
with three ETFs: a broadly diversified U.S. stock fund, U.S. bond fund and
foreign-stock fund.
Actively managed
funds: Regular readers know my fondness for index funds. What if you
prefer actively managed funds? Artisan Funds, Buffalo Funds and Scout
Investments will waive their regular minimums if you agree to invest $50 or
$100 automatically every month. Alternatively, for a $500 initial investment,
you can buy into the Homestead Funds and some of the Nicholas Company funds.
But if you want active management and you can get together
$1,000, consider one of T. Rowe Price Group’s target-date retirement
funds. That $1,000 minimum applies if you buy the funds in an individual
retirement account. I’m not predicting the T. Rowe funds will perform better
than other funds mentioned here. But I like the broad diversification they
offer.
A final point: An
account with $100 or $1,000 won’t do you much good. Want to amass decent money?
In your initial years as an investor, the key driver of your account’s growth
won’t be the investment returns you earn. Rather, what matters is the dollars
you sock away, so be sure to save as much as you can each month.
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