I see similar questions being asked in investing forums all the time.
Heck, at one point in my life, I pondered over this too!
If you can afford to set aside just $100 every month towards investing, the most common advice given is not to invest at all, but save up till you have a decent sum.
Actually, that is sound advice based on the simple fact that the average commission to trade today is about $7.
If you have to spend $7 for every $100 invested, that is a very high price to pay for the amount invested and realistically speaking, your chances of breaking even are very remote.
You really are better off putting that money in a savings account!
But in this post, I’m going prove conventional wisdom wrong and show you ways to invest even when you have very little to invest.
And kudos to you for even thinking about investing when you have very little to invest! You already have a head start!
STEP 1: Open an IRA instead of a regular brokerage account
The term IRA scares most newbies! But if you can open a regular brokerage account, you can open an IRA as well (IRAs do have income limits and other restrictions). The process is identical and takes the same amount of time. Every brokerage that allows you to open a regular account will also allow you to open an IRA.
The next question would be: Why?
Taxes, that’s why.
Let me share a personal story. A long time ago, I had the foresight to invest in a little fruit company, but did not have the foresight to buy into an IRA account. Now this little fruit company grew and grew and I saw my investment turn into a tidy sum. Now that I’m older and wiser, I think this money would be best served if put it in an index fund rather than being focussed on one company, but I can’t sell! If I sell I’ll be hit with a huge tax bill!
Now if I had bought these shares in an IRA account, I could’ve sold this stock anytime without having to pay any taxes! Dividends are not taxed either.
Learn from my mistakes.
STEP 2: Open an account in one of these brokerages
- You want a reputable brokerage that’ll be with you till your retirement
- You want a brokerage that won’t hit you with junk fees like annual maintenance fees and inactivity fees
- You want a brokerage that has a low barrier to entry
- And you want a brokerage that offers commission-free trading
Remember, switching brokers is an expensive, slow and a painful process. Get this right the first time.
My first choice would be TD Ameritrade. This is a brokerage firm that’s been in the industry for over 35 years and should be there when you retire! Though their commissions are slightly higher than their competitors ($9.95), I still recommend them. I’ll tell you why in a moment.
Why do I recommend TD Ameritrade?
- Has been in the industry for 35 years now
- No account minimum required to open an account, no maintenance fees
- The most important reason for my recommendation is because TD Ameritrade offers over 100 ETFs commission-free. This is more than any of its competitors
- The ETFs themselves are from reputable firms like Vanguard, iShares, Powershares and SPDR
- Fee-less bank account with Bill Pay, free checks, ATM access with no fees. Whether you are a college student or an employed professional, this is a very useful feature. Never pay for checks or for using the ATM again!
- You also have the option to trade in stocks, bonds, CDs, options and even forex
- Excellent set of tools including the X-Ray tool from MorningStar which normally requires a subscription with MorningStar, but offered for free with TD Ameritrade
- You aslo have the option to trade via your Mobile phone
My second recommendation would be Charles Schwab. They’ve been in business longer than TD Ameritrade and have a very good reputation. They are fiercely competitive and of late, have been offering ETFs at rock bottom prices. This is good for you as an investor.
Why do I recommend Charles Schwab?
- Has been in the industry for 40 years now
- Their minimum to open an account is $1000, but is waived if you setup an automatic monthly transfer of $100 into your account
- Zero commissions on Schwab ETFs
- The cost of their ETFs are one of the lowest in the industry
- Good mix of stocks, bonds and international equities in their selection of ETFs
- Access to high yield checking account with free billpay, free worldwide ATM use, free checks and with no account minimums
- You also have the option to buy stocks, bonds, CDs and options
- Option to trade via your smartphone
Fidelity is older than Schwab or TD Ameritrade. They too offer a host of services like their competitors. This would be my third recommendation if you don’t like TD Ameritrade or Schwab for some reason.
Why do I recommned Fidelity?
- Has been in the industry for 66 years now
- Requires a $2500 minimum for IRAs or $200 recurring monthly deposits
- Zero trading fees if you invest in select iShares ETFs
- Selection of over 30 commission-free ETFs
- Like its competitors, Fidelity too offers cash management via Savings and Checking accounts with free bill pay, free checks and ATM reimbursements
- Trading fees lower than TD Ameritrade and Schwab at $7.95/trade
- Mobile Apps
Why I chose these three brokerage firms?
You need a broker that will be still there when you retire. If you go with smaller firms for the wrong reasons (60 day commission free trades, $200 deposit if you move your IRA etc), you are being shortsighted. TradeKing doesn’t exist anymore, Zecco reneged on its no-commission policy, OptionsHouse increased its commissions…
Would I trust my retirement money with them? No.
2. Low Costs.
As an investor, you have no control over returns, but you have a choice when it comes to how much you are willing to pay to purchase a security. Costs matter. A lot. All three firms I highlighted above offer reputable ETFs at a good price and no commissions. None of them have junk fees like annual account maintenance fees and account inactivity fees.
And that’s the reason I do not recommend E*Trade. They too provide commission-free ETFs, in fact 80 ETFs, more than what’s offered by Fidelity and Schwab put together, yet I can’t find a simple ETF that tracks the S&P 500. They too offer banking services, but you need an initial deposit of $100 and a $5000 balance requirement to avoid fees.
I like Scottrade. I call them the last honest broker because they don’t charge one hidden fee that almost all other brokers charge including the three brokers I recommend in this post. A fee to transfer your account to another brokerage. If you simply want to try out a broker, I still recommend Scottrade. If you don’t like them you can move out without getting dinged with a fee.
They too used to offer commission-free ETFs. Used to. One fine day, they quietly shutdown their commission-free program. I would hate such disruptions in my retirement planning. Scottrade simply couldn’t attract enough investors to keep their commission-free program feasible.
Why not Vanguard?
Ok, so that begs the question why not simply go with Vanguard? They are a highly reputable firm, they are the pioneers of low cost funds, their funds are hugely popular and they too offer commission-free ETFs.
Here’s why. For an IRA, there is a $20 annual fee if you don’t have at least $10,000 in your account and $50,000 minimum in a regular account. Plus Vanguard does not provide banking services like the brokers I mentioned above.
STEP 3: Invest in low cost ETFs!
Ok, you’ve opened an IRA, decided on a broker but what should you invest in? First, don’t even think about investing in individual stocks. No-load mutual funds are good, but they usually have a minimum. Stick with commission-free ETFs.
Here’s what you do.
- Select a total stock market fund and a total bond fund from your commission-free ETF list
- Your age in bonds the rest in the stock ETF
- Make sure you tell your broker to reinvest dividends
- Dollar cost average and don’t try to time the market
Once you are comfortable with your new setup, you can always tweak your asset allocation. If you are young, you can go all stocks and zero bonds, or you can add emerging markets to your allocation, add REIT etc. For ideas, look at lazy portfolios. Be disciplined and stay the course. You will be rewarded.
I hope this research helps young but motivated investors. As Warren Buffett said, you are incredibly lucky to be born in a country where it is possible for individual investors to gain from the prosperity of the country. You are actually more luckier than Warren Buffett when he started out. Trading fees are the lowest it has ever been. You have access to information at your fingertips and available for free. Research shows that you don’t have to beat the market to make money. You can simply keep up with it, keep your costs low and enjoy a comfortable retirement.
Time is your friend. Combine that with patience and you will be amply rewarded.