M is for Money

You don’t need to save a bunch of money in order to start investing, you can start today with small amounts. For as little as $50 a month there are programs that allow you to buy mutual funds and other investments without fees. Have a little more money to invest? Then you have a greater range of options and little reason to sit on the sidelines.

My Start to Investing

I first started investing outside of my 401k in 2002, though I had little savings and plenty of debt. I knew I wanted to put my money to work, but I didn’t know how to get started. My employer’s 401k was with T Rowe Price, so I was familiar with their site. I soon discovered they had a program called Automatic Asset Builder (AAB) that allowed you to invest as little as $50 at a time. By enrolling in AAB they also remove the initial investment and balance requirements. It’s a perfect way for novice investors to start without the huge upfront cost.

Avoid Investment Fees

The biggest concern for small investors are the fees, which quickly eat up the cost of your investment. For mutual funds you should look for funds that are 100% no load – loads are transaction fees. There are plenty of funds that are low fee, which I’ll focus on. There will always be management fees for mutual funds, they are the cost to run the fund. The expense ratio of a fund is the percentage of assets devoted to managment. Management fees affect your returns and should be compared when deciding where to invest.

There are also the investments sold by brokers, like individual stocks and exchange traded funds (ETFs). These tend to be bad choices for small investors - there are fees for buying and selling which handicap your investment. Imagine it costs $10 per trade and you want to invest $100, you would need to make 20% on your investment just to cover the transaction costs. If you are going to buy stocks or ETFs, seek out low cost brokers and try to save up for a larger investment.

Invest in Mutual Funds

Mutual funds allow you to own shares in many companies with a single investment. Most mutual fund companies require a $2500 or higher initial investment. Here are a few mutual funds with lower barriers to entry:

• T Rowe Price – No minimum investment when you sign up for Automatic Asset Builder. Must invest a minimum of $50 per month with AAB, minimum balance requirements and fees are then waived. They have both domestic and international stock funds along with various bond and money market funds you can choose.
• American Century – Most funds require a $2500 initial investment but for Livestrong and OneChoice portfolios there is only a $500 initial investment when you sign up for automatic investment ($100 minimum per month). The OneChoice portfolios are diversified funds based on risk profile and range from very conservative to very aggressive.
• Fidelity SimpleStart IRA (Roth or Traditional) - No initial investment or account minimums with account builder. The account builder requires a $200 per month investment.
• USAA – You have to be a member of USAA to access their mutual funds. Membership is only open to members of the military, their family and to the family of existing members. I am a member through family for example. Like T Rowe Price there are no initial investment or account minimums when you sign up for their automatic investment plans. The monthly investment minimum is $50 but some funds allow investments as small as $20.
• Vanguard - The home of the index fund. Index funds are really a subset of mutual funds. Rather than a fund manager trying to beat the market, index funds try to match the market and often have lower expenses. Vanguard index funds require a $3000 initial investment. They also have the "STAR" fund, which is made up of non-index Vanguard funds and only requires a $1000 initial investment. Vanguard funds have a management fee for fund balances less than $10,000, but you can eliminate the fee by signing up for e-delivery of account information.

Low Cost Brokerages

Determined to time the market or buy stock in individual companies? There are brokerages that allow you to buy stocks and ETFs at a lower cost. Exchange traded funds (ETFs) are mutual funds that trade like stocks, so there are transaction fees associated with them. You can get many of Vanguard’s index funds in ETF versions that are not subject to a minimum initial investment. I own several Vanguard Index ETFs and only invested $1,000 - $2,000 in each. This is one exception to my never pay for investments rule. Low cost brokerages include:

• Sharebuilder – I use Sharebuilder. If you are a Costco member they offer a bonus for joining and trading. Their real time trades are $9.95 or they offer a low cost automatic investment plan for $4 per trade. I don’t think the automatic plan is a great deal, usually you invest small amounts with automatic plans. Say you invest $100 each time, the $4 purchase fee represents an immediate 4% loss. Sharebuilder has no account minimums.
• Zecco – Free trades is their biggest draw. You get what you pay for, so don’t expect great service. The free trades require a $2500 minimum balance, you can open an account with less but then you will pay $4.50 per trade.
• Scottrade - $7 trades, $500 minimum initial investment.
• Tradeking - $4.95 trades, $1,000 minimum initial investment.

Dividend Reinvestment Plans or DRIPs

Many companies have stock purchase plans where you can buy shares directly from the company without transaction fees. They often allow you to invest a fixed amount monthly and will reinvest your dividends into additional shares. You usually need to buy at least one share through a broker before you can join a DRIP plan. DRIPs are a topic to be covered in depth later, here is some info from Motley Fool to get you started.

Why to Start Investing Today

Don’t put off investing because you don’t have a bunch of money saved, as I’ve shown there are ways to get in the market with little money. Time is one of the biggest factors in investment growth, start today and you’ll be able to reach your goals sooner and more easily. The market has fallen significantly in the last year, my loss is your gain. No need to keep waiting, start now and start small.

Any other low-cost, easy to get started investments that you recommend?