When it comes to getting started investing, it is often that first step that becomes the biggest hold up. For many would-be investors the most formidable barrier is actually free, that of setting up an actual account. However, for those with the momentum to cross that line, the next barrier is the cost of investing, most often in the form of a minimum investment.
Skipping over these two barriers is one of the things that makes automatic investing apps like Acorns so attractive to new investors. They both eliminate the need to choose and set up a brokerage account and offer a way to get started investing with as little as five dollars.
No Minimum Investment Mutual Funds with Low Costs
Theoretically, a single investment in a mutual fund with a $1,000 doesn’t sound insurmountable. However, when every reputable financial advisor recommends diversifying your investments among several different funds, that $1,000 minimum quickly adds up to a $5,000 or even $8,000 minimum, to obtain the right kind of diversification. Throw in a 5.25% up-front load for many mutual funds sold by advisors, and that’s a lot of initial overhead.
Fortunately, there are many low-cost, do-it-yourself mutual funds that you can use to get started, if you know where to look. (There are also other options like low-cost ETFs, all-in-one mutual funds, and robo-advisors.)
Charles Schwab, Fidelity, and Vanguard, for example, all offer various forms of low-cost, low-minimum investment offerings. Schwab’s latest offer on some of its index funds includes not only zero minimum, but rock bottom expenses as well.
The most headline grabbing version is the Schwab Total Stock Market Index Fund, and the Schwab S&P 500 Index Fund. Both funds allow for investment with no minimum. They also both have a super-low 0.03% expense ratio for investors, even with those super low balances. Both of these funds offer exposure to the U.S. stock market, with the S&P 500 fund good for U.S. large caps. Of course, real diversification requires more than just big U.S. stocks. The Total Stock Market Index offers exposure to both large and small companies, but large companies outweigh their smaller counterparts on this index.
For more diversification, Schwab offers a Small Cap Index Fund. This offers good exposure to U.S. equities of smaller companies. For international exposure, there is the Schwab International Index Fund. These funds also have no minimum investment, and slightly higher (but still very reasonable) expenses of 0.05% and 0.06% respectively.
Throw in the U.S. Aggregate Bond Index Fund at 0.04% expenses, and you’ve got yourself a full set of low-cost mutual funds for basic diversification.
Cheap Do It Yourself Investing
Of course, do-it-yourself requires that you do it yourself. You will have to fill out the paperwork to set up your brokerage account. (It isn’t hard, and you can call a 1-800 number to get help if you need it. Don’t let that initial step stop you.)
Your best strategy is to set up an ongoing, automatic investment so that your funds keep growing as fast as possible.
Once you get your initial investments going, you will also need to rebalance them yourself. When your balances are less than $25,000, annual rebalancing will be more than enough.
Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson did not own any securities mentioned above, however, that may change at any time without notice. Please note that the material is not updated regularly and that some of the information may therefore not be current. Consult with your own financial professional when making decisions regarding your financial or investment options.