While those of us who’ve been investing for a while may find this week’s reader question a bit obvious, it’s one of the more popular questions we get. It’s about how to go about getting started with investing.
Where or whom do I talk to to open an S&P passive no-load index fund? Do I go to a bank or brokerage house or to the fund directly? I don’t have much money to start with but I need to start.
Thanks in advance. — Stephen
Before we get to Stephen’s question, here’s a quick video I shot on the floor of the New York Stock Exchange about things beginning investors should know.
Now let’s answer Stephen’s question.
Where can I open a mutual fund account?
Answer: theoretically, almost anyplace that handles money or investments.
Many bank branches now have a resident investment adviser, and many credit unions do as well. Brokerage firms offer all manner of investments, including mutual funds. Online investment firms also make it easy, and you can often go directly to many mutual funds as well.
That being said, Stephen is aware of a potential problem with going to some of these purveyors of financial products — commissions. He asks where he can buy “no-load” funds, which translates to no commissions. This is important: You obviously don’t want to lose a chunk of your investment up front to commissions.
Practically all brokerage firms and most other institutions that offer in-person investment advice make money through commissions, so they won’t offer no-load funds. And that radically reduces the choices.
For Stephen, and for you, the best place to buy no-load mutual funds is directly from the fund, or through online discount brokerage firms.
How do you do it?
Opening an online account with a no-load fund is not much different than opening a bank account.
I personally use Vanguard for my investments, including mutual funds, so I’ll use them as an example.
According to Vanguard, it takes about 10 minutes to provide the information, which will include the type of account (IRA, individual, joint, etc.), your Social Security number, date of birth, email address, physical address, and employer name and address.
The next step will be to pick the investment you want. In Stephen’s case, he’ll select the Vanguard 500 Index Fund Investor Shares. That’s the S&P no-load index fund I assume he’s talking about. I’ve mentioned it many times, most recently in “Here’s All You Need to Know About the Value of Wall Street Advice.”
Step 3 will be to fund the account. You can either send them a check, or attach a bank account to your investment account and have the money transferred.
That’s all there is to it. Other online firms may be slightly different than Vanguard, but the basics will be similar.
Meeting the minimum
As Stephen will find when he opens his new mutual fund account, there are minimums to be met. For example, the Vanguard 500 Index Fund has a minimum initial investment of $3,000. Too rich for your blood? There are workarounds.
First, you could obviously save the money in a regular savings account, then transfer it to your investment account.
You could also ask about systematic investing. That’s investing fixed amounts at regular intervals, such as monthly. Some firms waive their initial minimums for regular investors. For example, they might allow you to open an account with only $50, providing you agree to automatically continue investing in $50 increments at least monthly.
But don’t try that with Vanguard. I called them and was told the minimum to start most accounts is $3,000. (Vanguard Target Retirement Funds, which are funds made up of Vanguard index funds, have a $1,000 minimum initial investment.)
However, according to The Wall Street Journal, USAA, another giant investment firm, does allow it. The Journal wrote:
USAA waives the $3,000 minimum on the majority of its 48 funds if you agree to invest $50 per month directly from your savings or checking account. (USAA markets to members of the U.S. military and their families, but its investment products are available to the general public.)
A final option is to forgo traditional mutual funds and invest instead in exchange traded funds or ETFs. These funds trade on exchanges like shares of stock, and can be bought in increments of as little as one share. Like stocks, there’s typically a commission to buy or sell, but some companies allow commission-free trades. According to the Journal, TD Ameritrade is one of those firms, and their minimum account size is only $500.
Now for some general rules for beginning investors.
Rule No. 1: Long-term money only
When it comes to stocks, the longer your investment horizon, the lower the risk. Day trading is risky because nobody knows what’s going to happen on any given day. Investing over decades carries far less risk, because quality companies become more valuable over time, and so do their shares.
That’s why you should never put money in stocks you’ll need within five years, minimum.
Rule No. 2: Moderation
Because the stock market is risky, it’s not the basket for all of your eggs. In the video above, I suggest subtracting your age from 100, and putting no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings.
But as I also said, that’s just a rule of thumb. If you’re nervous, you’ve invested too much.
Rule No. 3: Use mutual funds
I like buying individual stocks (you can see my online portfolio here) but it’s not necessary or, for most people, advisable. You can do perfectly well with a mutual fund, while at the same time lowering your risk and reducing your hassle.
If you’re not familiar with a mutual fund, here’s the concept. Mutual funds are just giant pools of investments. It could be a pool of stocks — a stock fund. It could be a pool of bonds — a bond fund. Or it could have both stocks and bonds — a balanced fund.
The appeal of mutual funds is threefold:
- A mutual fund allows you to spread the inherent risk of stock investing by diversifying among a bunch of stocks instead of investing in just a few.
- Mutual funds have professionals who do the buying and selling.
- Mutual funds keep track of a lot of the paperwork for you.
Growing in popularity is another type of mutual fund I mentioned above, the exchange traded fund or ETF. As the name implies, they’re mutual funds that trade on exchanges like stocks. I won’t offer further explanation here, but if you do a search for “ETF,” you’ll be reading for weeks.
Rule No. 4: No trying to time the market
Try to time the market and you’ll likely find yourself on the sidelines when the market takes off — and over-invested when it crashes.
The best way to approach stocks is the one I mentioned above — systematic investing. All you have to do is invest fixed amounts, like $50, at regular intervals, such as monthly. This method works for a simple reason: It automatically buys more shares when they’re cheap, and fewer when they’re not.
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