How To Invest When You Don’t Have Much Money
For all the great strides Wall Street has made in making investing easy and affordable for the average person over the past few decades, investing still costs money. Most mutual funds have minimums in the thousands of dollars (not hundreds), and brokerage commissions make buying individual stocks prohibitively expensive if you only have a little to invest. Even so, the power of compounding makes it imperative that you start investing as early as possible, even if you don’t have a lot of spare cash. So, how to invest when you don’t have much cash?
Learning how to invest with limited assets is a simple matter of knowing how to avoid getting ripped off by unscrupulous financial advisors. Plenty of mutual funds out there have low minimums, but the majority of them charge outrageous fees for the privilege of handling your money or have such a narrow investment focus as to be useless.
How To Invest When You’re Broke
Look For All-In-One Funds With Low Minimums
There are plenty of low-cost, diversified mutual funds costing as little as $1000 to get started. My favorite of the bunch is the Vanguard Star Fund, which just might be the perfect all-in-one fund for beginners. It is a moderately-aggressive fund that invests in all the 4 major asset classes (domestic stocks, small-cap stocks, foreign stocks, bonds), carries an expense ratio of just 0.32% per year (as of 9/19/09), costs just $1000 to get started. You probably won’t find an easier way to get started.
Alternatively, you could invest in a so-called target retirement fund from one of the major mutual fund companies. Target funds usually cost a bit more to get started ($2,500-3,000 on average) but are designed to be a one-stop investment you can hold forever.
Look At T Rowe Price Retirement Funds
T Rowe Price is a well-respected mutual fund company known for its conservative investment approach and emphasis on safety over huge returns. T Rowe Price funds tend to be a bit more expensive than their Vanguard counterparts, but are generally more accessible to small investors. T Rowe currently has a program where they will let you buy into one of their excellent all-in-one target retirement funds for as little as $50 upfront if you agree to automatically invest $50 in the fund every month. If you can spare $50 per month, this is by far the easiest and cheapest way to get started investing in a top-quality fund. You can research T Rowe Price funds on Morningstar by signing up for a free Morningstar membership.
Don’t Worry As Much About Diversification
No folks, I haven’t gone crazy. Diversification is still extremely important, but think about it. If you currently have a $3000 portfolio and save $1500 per year, your account balance is going to depend far, far more on your savings rate than on your investments’ returns.
The ideal solution would be to buy a diversified all-in-one fund and build up your assets to the point of being able to easily customize your asset allocation, but the reality is that due to tax consequences that strategy will only work in a tax-deferred account such as a 401k or IRA. In a taxable account, it’s perfectly fine to buy one fund at a time and remain undiversified until you’ve filled out your desired asset allocation (within reason, of course). Some experts might disagree with this, but I think tax considerations are important.
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I must say, your logic makes sense. If you might, I think you should add one thing about those target dated funds for these beginning investors. If they were to pick one, they should look ten to twenty years beyond they date they imagine they might retire. They will get a better stock to bond allocation – at least in theory.
I’m still not sold on these funds in large part because they are as yet unproven to do as promised, some doing worse than a simple index fund and they tend to contain orphan funds that didn’t do well on their own.
For the beginner a great (okay, better than doing nothing) idea but those transparency and performance issues bug me.
Interesting article. Thanks for sharing, your advice sounds good.
I am interested in investing in some kind of a fund that has most of the major banks in them,such as wells fargo,j.p. morgan, chase,bank of new york,goldman sachs. Also a fund that carries the major commercial real estate such as malls, hi rise condos,and last but not the least a fund that handels a lot of the financial stocks. I do not know if this would be in a etf type or what. Can you help me out on this? Thank you
Jeff, the Vanguard Total Stock Market Index Fund (VTSMX) contains pretty much every stock worth owning in America. Approximately 15% of the fund is invested in the financial sector. If you want a bit more exposure to financials, perhaps the Vanguard Value Index Fund (VIVAX) would be more to your liking. It invests approximately 24% of its funds in financials.
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It is also customary to cite evidence when making ridiculous accusations lest they be dismissed as baseless.
Don’t forget to look at your own expenses. If you are the unfortunate one to be in debt, paying off your debt may provide you with more money than investing it. What’s the point of “investing” money trying to get a 8-12% return, if you’re getting charged 20% interest on those credit cards.
I have the Vanguard Star fund in my Roth IRA account. Didn’t have enough to open with $3000k so Star was the only option. Once there’s more in there I’ll look to see if other funds are more appropriate.
These days you can also invest cheap with EFT’s in a company like Sharebuilder that allows fractional shares.