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 gradually save $3,000 in a regular savings account, then transfer it to your investment account and buy the fund. (As I mentioned above, most online brokerages allow you to link your bank account to your investment account and easily transfer money back and forth.)
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, are an exception, with a $1,000 minimum initial investment.)
Another 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 as small as one share. Like stocks, there’s typically a commission to buy or sell, but some companies, including both Schwab and Vanguard, allow commission-free ETF trades.
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, if you invest in stocks, you should never use money that you’ll need within five years.
Rule No. 2: Moderation
Because the stock market is risky, it’s not the basket for all of your eggs. I suggest subtracting your age from 100, and putting no more than the resulting number as a 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: Don’t buy individual stocks
Buying individual stocks is fine if you’re up for the additional risk and have the resources, but it’s not necessary or, for most people, advisable. You can do perfectly well with a mutual fund or ETF, while at the same time limiting your risk and reducing your hassle.
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 overinvested 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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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.