A few weeks ago, I wrote a post about the best places for new investors to open investing accounts. But a complementary decision (and, perhaps, a more important one) isn’t where to invest, but how.
I began to answer that question recently as well, in my review of The Investment Answer. It’s a book that makes, I believe, an airtight case for a simple buy-and-hold investing strategy.
In a nutshell, the book demonstrates that not only do frequent traders fail to beat the overall market long term, so do most professional mutual fund managers. The authors’ advice? Pick mutual funds or exchange-traded funds (ETFs) that track the overall market and have low expense ratios. Allocate your money based on how long you have to invest, and work with a fee-only advisor now and then.
When you’re starting to invest, I realize you probably don’t want to spend several hundred dollars for a financial planner to help you build your first portfolio (even though it might be money well spent). But if you go it alone, you might yourself overwhelmed investment choices.
In late 2008, there were over 8,000 open-end mutual funds on the market. Add on ETFs and closed-end funds, and you get way more choices than any normal person wants.
So, I built you a short list.
Just because a fund didn’t make this list doesn’t mean it’s not a good choice for a new investor…there are hundreds of good, low-cost funds out there. But these are good bets.
If you’re looking for your very first investment…especially if you are only investing enough to buy one fund, consider an ETF that tracks the market and has super-low fees. Otherwise, Dodge & Cox Stock Fund and Fidelity Contrafund are good bets for managed funds providing a mix of domestic and foreign stocks with less than a 1.0% expense ratio. (Here’s a refresher on expense ratios and other mutual fund fees.)
|Vanguard Total Stock Market ETF||VTI||Entire market index.||0.07%||–|
|iShares 3000 Index ETF||IWV||Stock index.||0.21||–|
|SPDR S&P 500 ETF||SPY||Stock index.||0.09||–|
|Dodge & Cox Stock||DODGX||Domestic/foreign stocks.||0.52||$2,500|
|Fidelity Contrafund||FCNTX||Domestic/foreign stocks.||0.91||$2,500|
MIXING UP YOUR STOCKS
When you have more money to invest and want to start properly diversifying your investment portfolio, you may want to look beyond general index funds and blue chips (stocks of large domestic companies). That’s when funds like these (targeting smaller companies and foreign investments) will come in handy.
|Vanguard FTSE All-Word ex-US ETF||VEU||Foreign stocks.||0.22%||–|
|Wisdom Tree Small Cap Earnings ETF||EES||Small cap stocks.||0.38||–|
|Vanguard Large Cap ETF||VV||Large cap stocks.||0.22||–|
|Vanguard Small Cap ETF||VB||Small cap stocks.||0.12||–|
|Dodge & Cox International Stock||DODFX||Foreign stocks.||0.65||$2,500|
|T. Rowe Price Mid Cap Growth||PRSVX||Mid cap stocks.||0.83*||$2,500|
|T. Rowe Price Small Cap Value||RPMGX||Small cap stocks.||0.80||$2,500|
BONDS AND BEYOND
As you mature as an investor, it will come time to add bonds or—if you want something more exotic—even commodities or real estate trusts to your portfolio. Start here.
|Vanguard Total Bond Market ETF||BND||Mid-term bonds.||0.12%||–|
|PowerShares DB Commodity Index Tracking ETF||DBC||Commodities index.||0.81||–|
|Vanguard Emerging Markets ETF||VWO||Foreign stocks.||0.22||–|
|Harbor Bond Institutional||HABDX||Mid-term bonds.||0.55||$1,000|
|Vanguard REIT ETF||VNQ||Real estate.||0.13||–|
*A load (sales charge) may also apply to this fund.
Want to learn more about any of these funds? Check out Morningstar.com where you can get basic fund quotes or create a free account to track sample portfolios and more.
A FINAL NOTE ABOUT ETFS
You’ll notice many of the funds here are exchange-traded funds (ETFs). Because many ETFs have very low expenses and the minimum to invest is simply the price of a single share, often less than $100, they’re attractive to new investors with a long time to invest.
That said, unlike many mutual funds to which you can make regular investments, you traditionally have to pay a trade commission every time you want to pick up more shares of an ETF. That gets expensive. Trade commissions eat returns!
Fortunately, many brokers now offer select ETFs commission-free.
Fidelty has 30 commission-free iShares ETFs. Vanguard gives brokerage clients access to their 46 ETFs commission-free. Scottrade, too, has introduced 15 commission-free Focus Morningstar ETFs which they’re advertising as having lower expenses than even Vanguard ETFs. The Focus Morningstar US Market ETF (FMU), as an example, has an expense ratio of just 0.05%. (Read our review of Scottrade here).
What about you? What are you favorite one or two ETFs or mutual funds for long-term investing?