How To Start Investing With Just $100
For those interested in investing but without much cash to begin with or much knowledge of what to do, Richard Jenkins of MSN Money has an interesting strategy that can help you keep your portfolio well diversified with relatively low transaction costs. The idea surrounds an account from an investment company called ShareBuilder which has no minimum balance requirements, no inactivity fees, and only costs $4 for every trade you make. The gist of the strategy goes something like this:
After opening an account, put your first $100 in a broadly diversified ETF that represents the entire stock market, such as the Vanguard Total Stock Market VIPER. Every month after that, continue investing as much as you can. Put 100% of each month’s contribution into one of the following ETFs, each of which invests broadly in one of five major asset classes:
* Vanguard Total Stock Market VIPER (VTI), which tracks the Wilshire 5000, an index of approximately 6,500 U.S-based stocks. It’s like buying virtually the entire stock market. [domestic stocks]
* iShares MSCI-EAFE (EFA), which corresponds to the Morgan Stanley index of stocks trading in Europe, Australia and the Far East. [foreign stocks]
* iShares Lehman Aggregate Bond (AGG), which attempts to track the price and yield performance of the total U.S. investment grade bond market. [bonds]
* iShares Dow Jones US Real Estate (IYR), which holds a basket of 75 real estate investment trusts (REITs) that represent that sector of the U.S. economy. [Real Estate]
* iShares Dow Jones US Basic Materials (IYM), which includes stocks in the energy, basic materials and precious metals sectors.* [commodities]
(* Once your portfolio reaches a total value of at least $25,000 — and it will! — you’ll want to switch your commodity allocation to the PIMCO Commodity Real Return Strategy fund (PCRDX), which more accurately captures the returns of the commodity futures market than a collection of stocks can. The fund has a minimum initial investment of $2,500, which makes it impractical for smaller accounts.)
As you invest in subsequent months, rotate your purchases among the five ETFs until you reach your target percentage for each one. Concentrating your purchase in a single ETF each month minimizes your commission costs.
[Read the full article HERE]
One caveat: While Mr. Jenkins does show the results of following his strategy over time, there may be others ways to invest and get similar returns without having to pay the $4 transaction costs, for example with some no-load mutual funds.
Some vocabulary:
ETF - Exchange Traded Fund. A fund that tracks an index, but can be traded like a stock.
Index - A statistical indicator providing a representation of the value of the securities which constitute it. Indices often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured.
REIT - Real Estate Investment Trust. A corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT)
For help with other vocabulary, feel free to visit investorwords.com.
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