I am still talking in terms of a small account, small money. In my previous post I told that every small beginning investor can start from nothing. If an investor sticks to the saving plan by transferring a little share of her salary into a savings account, soon she will end up with some good starting amount of money. Also her behavior will change significantly, because she will learn saving money instead of living in debt. I am surprised that many Americans live in huge debt and mostly those people who cannot afford it use credit cards or any other type of loan to buy things they do not need and make themselves end up in even deeper debt. Saving small amount of money can teach everybody how to manage personal money to get out of the debt and create some reserves.
However I assume that an investor is free of debt or he saves some portion of his salary while paying the debt off.
When investor’s savings account shows some money, transfer them into a broker’s account. If the new investor is not familiar with stocks, she may start investing into ETFs or Mutual Funds. However at the very beginning I wouldn’t recommend investing into ETFs with small money. It is very expensive. If an investor can invest only $150 a month it would be very painful investing into a single ETF every month. Because ETF is traded like a stock he will pay commission every time he sells or buys ETF. With this little amount the commission will be 6% (it depends on a broker, but with TD Ameritrade i.e. the commission is $9.99 per trade, so $9.99/$150 = 6%).
I would recommend investing into NTF Mutual Funds instead. The advantage is that there will be no transaction fees involved when buying or selling NTF Funds. The disadvantage is that the funds still require minimum initial investment. The investor shall save the initial investment on her savings account first and then transfer the money to her broker and purchase her first fund.
You can pick some funds as I did for investing to diversify. Since I have two accounts – one for stock trading only, second is my Roth IRA where I invest conservatively. I selected those funds in my IRA account:
|Symbol||Group / sector||allocation||initial investment||additional investment|
|SWLNX||US Large Caps-Growth||40%||$0||$0|
|NNLEX||US Small Caps-Growth||30%||$0||$0|
I recommend that you should do your own research on NTFs prior investing. I wanted to have more aggressive portfolio and I believe this allocation reflects it.
With this starting portfolio I will invest $150 every month into one fund and rotate my investments. Those funds, which require larger initial investment I will save the amount on savings account first, then transfer the amount into IRA and invest it later.
There is a very good article on investing small money on MSN Money by Richard Jenkins, however unlike him I wouldn’t recommend investing into ETFs at the beginning. Originally I started my IRA account the way he recommends in his paragraph but later I realized how expensive it was (unless you trade with no commission broker). If an investor still insists investing into ETFs, the only recommended way to do it is via saving small amount on a savings account first and invest at least $500 (better $1000) into ETF later.
Next step is re-balancing the portfolio. R. Jenkins describes it very well and I stick with this method. I invest into each fund accordingly to keep the allocation at the target. For example when I invest the initial $1000 into RYMBX the allocation will be more than 5%. The next investment will be located into other funds to bring them up to targeted allocation and I start investing into RYMBX again after other funds will meet allocation target.
This investing strategy is for a very long haul. I do not trade these funds, I invest into them. I apply a dollar averaging strategy unlike trading stocks I believe investors can do it with mutual funds or ETFs, because the risk of bankruptcy of a fund or ETF is a lot smaller than individual company. Applying dollar averaging into Enron would ruin a part of investors’ portfolio. There fore I trade stocks, but invest into funds.
We all want to hear your opinion on the article above:
|All Dividend Investing, Options Trading, Personal Finance|