Where to Start

March 9, 2007

Hey young person, we know you have much cooler things on your mind than mutual funds: your MySpace page, Bradjelina, Britney Spears' hair. But you're never too young to start investing, and acting now means that you have years upon years of compounding returns coming your way. Smartmoney.com drops some knowledge on how to start an investment-izzle portfolio-shizzle with as little as $20:

If you are just beginning to save for retirement there are a few basic rules to follow. First off, you want to contribute the same percentage of your salary to your account as the company match. So if your employer pitches in 6% you should, too, regardless of how much belt tightening you have to do. If you don't, you're just throwing away a cash gift from your firm. And it's always smart to increase your payments every year in stride with whatever annual salary increase you get. Financial advisors like to see clients contributing 10% of their annual salaries.

The simplest investment to start with is a low-cost index fund. These no-frill options — found in every 401(k) plan — will track the returns of a benchmark like the Standard & Poor's 500 index. If you're saving in a brokerage account, make sure the index fund has an expense ratio around 0.2% a year, or about $20 for every $1,000 you invest. Anything over 0.5% is too expensive. If you think you need a big wad of cash to get started... well, you don't. Some firms like T. Rowe Price will waive their minimum-investment requirements on a wide selection of funds if savers agree to invest, say, $50 a month. Under the "Fund Quicklist" section on its web site, the Mutual Fund Education Alliance lists 1,800 funds that have these low minimums. We would suggest coupling an S&P 500 index fund with one that tracks international stocks, at least until you become more comfortable with investing.


See also:
Ask MAX: Can I build a fund portfolio with just $17,000?
Ask MAX: Investing $20 a month?
Ask MAX: Where do I start?