The small investor has some truly excellent options these days. Two in particular are just this side of awesome. The first is index ETFs (exchange-traded funds). The second is low-cost online trading. ETFs and cheap online trading form a powerful combination for the small investor.
In addition, the wealth of online investment information is voluminous, and in many cases free.
So for the small investor (whom I define as someone with < $1,000,000 of net assets to invest), 2010 is a pretty great starting point to get serious about personal finance
I recommend that before you embark, that you have at least a 3-month emergency fund and little to no credit-card debt. If this doesn’t describe your financial situation, this article doesn’t currently apply to you. [Please consider paying down those credit cards and then saving up a modest rainy day fund!]
However, if you meet these basic criteria consider the following suggestions:
- Open a Vanguard account with a minimum of $3000. Put those first funds in either the Prime Money Mkt Portfolio or the Tax-Exempt Money Market
- Keep putting spare money into Vanguard. Once you hit $10,000 to $25,000, consider other Vanguard offerings. If you are unsure of what to invest in, call a Vanguard adviser.
- Consider maxing out your 401k contribution, if your income permits. Keep that “rainy day” fund in mind. A rainy-day fund is cash, money market, or diversified short-to-intermediate AA or better rated bonds or CDs. Stocks, mutual funds, etc. don’t count for rainy day cash.
- Keep that Vanguard account. If your tax situation permits, consider making Roth IRA contributions. Vanguard is a good place to hold these, Fidelity is another.
- Once you’ve got your rainy-day fund to 9 months or more, and can maintain solid 401k and Roth IRA contributions, congratulations. You may be read to become a “big-time small investor”.
Enough preamble. Let’s assume you are ready. Now what?
You can select any number of online brokerages and invest for less than $9 per trade. That includes option trades. Some even allow futures trades. So, the world is your oyster.
However, prudence is crucial. There are just so many opportunities, options, pitfalls. May I make a few suggestions?
- Start by investing in ETFs. Consider, SPY, VTI, BND, VEU, and, now, VOO. These are excellent diversified ETFs with very low expense ratios.
- Want to dabble in individual stocks? Diversify. If you buy some tech stocks, also buy some consumer goods, or basic materials, or utilities.
- Want to dabble in options? Try starting with writing (selling) covered calls on your ETFs.
- Futures? Think once, think twice. Do some research and think a third time. The just maybe you might given them a try. But, please, please do so with caution. [Note futures contracts require a margin account… please tread carefully with margin (aka leveraged) investing.]
That is just a start. Might I also point out that an investor today could construct an excellent life-long portfolio with just VTI, BND, and VEO… re-balancing annually as age and situation dictate? As age 60 approaches, mixing in a few laddered CDs (bank certificates of deposit) is not an unreasonable option. Owning and paying-off a home is also a reasonable retirement goal.
I, however, am now content to fully adopt a reasonable and prudent approach. I also dabble with a small Crazy Ivan Account (CIA), and with (limited) option strategies. I also incorporate rental real estate into my investing mix.
The point I want to emphasize is that there are so many opportunities for the modern small investor. It is easy to feel overwhelmed by the choices. But, by starting with the basics — Vanguard mutual funds, low-cost diversified ETFs, and online investing — it is possible to construct and manage very solid personal portfolios.