Here are two questions I get all the time:
“Okay, I know I need to open an IRA. But where? E*Trade? Fidelity? My local bank?”
“How can I start investing with just $500?”
Today, I’m going to quickly tackle both. If you’ve been holding out on starting your own Roth IRA or other investment account, no more excuses. I’m going to show you how (and where) to open an account today—even if you can only deposit a couple hundred bucks.
Note: Before we dive in, if you’re in credit card debt, focus your efforts on paying that off before starting to invest. See my six and a half steps to financial security for more guidance about what to do first and when to start investing.
In a world with tens of thousands of investment options and a torrent of market information flowing 24/7, the simple act of opening an account to invest for your future retirement is intimidating.
It doesn’t have to be.
You can ignore how the stock market’s doing today. You can forget the thousands of individual stocks. The key is to put your blinders on and focus on what’s important:
- Opening the right kind of account.
- Getting your money in.
- Minimizing expenses.
THE RIGHT KIND OF ACCOUNT
If you earn less than $120,000†, the first kind of investment account you should open is a Roth IRA (individual retirement account). Even if you already have a 401(k) at work, the Roth IRA is a powerful account for long-term investing because in a Roth, you money grows tax-free and, when you retire, you withdrawals are tax-free, too.
In 2011, investors under 50 can contribute up to $5,000 in a Roth IRA. If you’ve already done that (or earn too much to open a Roth, you may consider opening a taxable investment account). With a taxable account, there are no restrictions to how much you can invest or when you can withdraw money, but you’re responsible for paying income taxes on your gains annually.
It’s important to note that account types (like Roth IRA, traditional IRA, etc.) are nothing more than labels to your investments for tax purposes.
An IRA is like a bucket.
Once you have that bucket, you can fill it with anything you want…stocks, bonds, mutual funds, certificates of deposit, even peer-to-peer lending notes.
Just to be clear: when you open IRA and begin buying stocks or mutual funds, you’re no less of an investor than somebody with a taxable trading account.
GETTING YOUR MONEY IN
The next step is to just start investing. The sooner you get your money out of your checking account and into a mutual fund, the sooner you can potentially earn a return. Forget about what the stock market is doing today or what you think it wild or next week. The right time to invest is when you have the money to invest.
Every year, SmartMoney Magazine conducts an exhaustive survey of discount and full-service stock brokers. (When I worked there, I actually helped with the research, and can attest to just how through they are). So you would do well to pick any of their picks for 2010 best discount brokers. The top six are:
But SmartMoney’s rankings aside, where’s the best place for a NEW investor to open an account?
Ideally, somewhere that doesn’t require a big opening deposit, doesn’t charge low-balance fees, and offers a variety of low-cost mutual funds. Here’s a look at how several popular brokers (including SmartMoney’s top five) look to new investors. (The list is in no particular order).
SOME BROKER PICKS FOR FIRST-TIME INVESTORS
|Fidelity||$2,500/$2,500*||25 commission-free ETFs.||$7.95|
|E*Trade||$500/$0||Great banking services, too.||$9.99|
|Charles Schwab||$1,000/$1,000*||13 commission-free ETFs.||$8.95|
|TD Ameritrade||$2,000/$1,000||15,000+ mutual funds.||$9.99|
|TradeKing||$0/$0||$14.95 no-load fund trades.||$4.95|
|Zecco||$0/$0**||$10 no-load fund trades.||$4.50|
*Minimum deposit waived with recurring automatic investments.
**Zecco charges a $30 annual fee for IRAs. You also get 10 free trades a month when you have an account balance of $25,000 or make 25 trades in a month.
***Disclosure: I have affiliate relationships with E*Trade, TradeKing, Zecco, and Scottrade, and ShareBuilder (listed below).
Update: As numerous people have aptly pointed out in the comments, new investors should also strongly consider Vanguard mutual funds. I didn’t originally include Vanugard here because most of the funds require a $3,000 minimum initial investment, which may be off-putting to some new investors. That said, their collection of low-cost mutual funds are IDEAL for buy-and-hold investors that will HOLD funds for many years or even decades. Again, check the comments, and give Vanguard due consideration.
An alternative to the brokers listed in this table is ShareBuilder. Owned by ING Direct, ShareBuilder is catered to investors who want to invest a small amounts on regular schedules. For $4 per automatic investment or a small monthly fee that gets you unlimited investments, you buy shares (and fractional shares) of stocks on a regular basis.
Wherever you decide to invest your money, an often-overlooked key to successful investing is to keep your expenses to a minimum.
What does that mean?
For one, it means holding your investments for a long time to avoid racking up commission fees.
Next, it means paying attention to a mutual fund’s loads, transaction fees, and expense ratios. Mutual fund loads are basically sales charges for buying the fund. Transaction fees are charged on some funds (often those without loads) for buying or selling shares. Finally, a fund’s expense ratio is the cost to run the fund). The expense ratio covers things like the investment advisory fee, administrative costs, and other operating expenses. Your broker may list a mutual fund’s expense ratios, or you can get free research on tens of thousands of mutual funds from fund-rating service Morningstar.
THE BOTTOM LINE
There’s a lot to learn about investing, but ignorance is no excuse for inaction.
If you’re debt-free, have secured a decent stash of emergency savings, and are wondering what to do next with your money, it’s probably time to start investing. Take it slow, learn as much as you can, and start buying to some mutual funds and ETFs. Don’t start trading like crazy, and don’t worry about what the market’s doing from day to day.
Slow and steady wins the race.
What about you? Where do you invest and why?
† This is an oversimplification. Read more about the Roth IRA income limits.