Small Investors: The Best of Times

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?

  1. Start by investing in ETFs.  Consider, SPY, VTI, BND, VEU,  and, now, VOO.  These are excellent diversified ETFs with very low expense ratios.
  2. Want to dabble in individual stocks?  Diversify.  If you buy some tech stocks, also buy some consumer goods, or basic materials, or utilities.
  3. Want to dabble in options?  Try starting with writing (selling) covered calls on your ETFs.
  4. 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.

Best wishes.

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