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The following post comes from Matthew Amster-Burton at partner site Mintlife.
People often ask me, “Are there any investments for people with very little money to invest?”
Normally, my response is one nobody wants to hear: Put the money in a savings account or savings bond, check out a book about investing from the library, save more money while you read the book, and start investing once you have the $1,000 minimum to open an account at a big mutual fund house like Schwab or Vanguard.
I stand by that advice. (By the way, my favorite introductory investing book is Elements of Investing, by Malkiel and Ellis.)
But that doesn’t actually answer the question, does it? Maybe a kid wants to invest a $100 birthday check from Grandma, or maybe you want to get started on retirement savings right this second, before you change your mind.
Those are good reasons. Twenty years ago, the answer would have been depressing: You could buy a couple of shares of stock in a company or two and pay a hefty brokerage fee for the privilege. You’d be down a few bucks from Day 1 (thanks to the fee) and dangerously undiversified.
Technology and years of brokerage price wars have changed all that – to the point where, for less than $50, you can buy a fully diversified portfolio of thousands of stocks and pay pennies in expenses. So I went looking for an online brokerage that treats the low-dollar investor right. These were my criteria…
- No minimum opening balance. In fact, no minimum balance, period.
- Access to diversified, low-cost, commission-free stock and bond ETFs. “Commission-free” means you can buy and sell them without paying a fee.
- No other fees. If you’re investing $100 and get slapped with an $8 fee, you’ve just lost 8 percent of your portfolio.
- Choice of IRA, Roth IRA, or taxable account.
This is a strict list of demands. There are a lot of discount brokerages out there, but this narrows them down to two. This is not to say these are the best brokerages overall, just that they’ll take you in and treat you right if you only have a single Benjamin.
The two finalists are…
TD Ameritrade offers more than 100 commission-free ETFs including top brands like iShares and Vanguard. For $100, you can buy two shares of Vanguard Total World StockETF (VT). When you buy a share of this ETF, you literally own a tiny slice of more than 3,500 stocks from companies the world over.
Want to add bonds? TD offers plenty of good bond funds too, like iShares Treasury Inflation-Protected Securities ETF (TIP) and Vanguard Total Bond ETF (BND). Bond funds tend to cost a little more per share than stock funds, but still, for under $200, you could buy (prices as of May 2, 2012):
VT (2 shares): $95.40
BND (1 share): $83.69
Total: $179.09 (53 percent stocks/47 percent bonds)
It would be hard to come up with a much better portfolio than that, even if you were investing a million dollars.
Firstrade offers 10 commission-free ETFs. Sure, TD has 10 times as many free ETFs. But it only takes a couple of good ETFs to build a solid starter portfolio. Among Firstrade’s offerings, I like the iShares S&P 500 ETF (IVV), which holds the 500 biggest U.S. companies, and the Vanguard Intermediate-Term Bond ETF (BIV), which invests in high-quality corporate and U.S. government bonds.
Unfortunately, the iShares ETF breaks the bank: Its share price is more than $100. My second choice is the Vanguard Dividend Appreciation ETF (VIG). At only 134 stocks, it’s not as diversified as the iShares fund, but your portfolio isn’t going to be stuck at $100 forever, and VIG is a perfectly respectable introduction to the ups and downs of stock market investing.
One warning: When you buy a commission-free ETF at TD or Firstrade, you have to hold it for 30 days before selling – or pay a hefty fee. Since you’re putting this money away for the future, and “the future” isn’t going to be here two weeks from now, I trust this won’t be a problem.
What are you waiting for?
You hear people complain that the deck is stacked against the small individual investor. Well, there’s never before been a time when the small investor could get into a fully diversified portfolio for under $200 without paying a dime in brokerage fees. Plus, you can do it all in a few minutes in your pajamas.
Guess it’s time for me to update my advice.