New Investors

Don't Do That

July 9, 2007

The Wall Street Journal's Jonathan Clements lists four pieces of financial advice 20-somethings SHOULDN'T take:

1. DON'T build an emergency fund equal to six months of living expenses:

Let's be honest: This is dull, unrealistic and -- I would argue -- not all that sensible. Even if you regularly sock away 10% of your after-tax income, it might take four years or so to amass six months of living expenses. At that juncture, you are supposed to leave this money in low-risk investments, where it will earn modest returns for the rest of your life."

2. DON'T buy a bigger house than you can afford:

Borrowing a huge sum to purchase an unnecessarily large house is financial foolishness. You will saddle yourself with hefty monthly mortgage payments and a lifetime of large utility bills, maintenance costs, property-tax payments and home-insurance premiums. Rather, when buying that first home, you should strive to purchase a place that's the right size for you and your family -- and that you can see living in for a good long time."

3. DON'T buy life insurance:

Don't do it. To be sure, under the right circumstances and with the right policy from the right company, cash-value life insurance can be a decent investment. But for those in their 20s, these policies are unlikely to make sense.

Remember, the principal reason to buy life insurance is to protect your family -- and you may not even have a spouse, let alone kids. And if you are married with young kids, you no doubt need a heap of coverage. The cheapest way to get that coverage is with term life insurance, which offers a death benefit and nothing more."

4. DON'T invest as aggressively as possible:

You don't want to invest heavily in stocks and then panic and sell during the next market plunge. Yet that's a real danger if you are new to the market and you have never lived through a market decline.

My suggestion: Start with 60% stocks and 40% bonds. If you find yourself unperturbed by market swings, move your stock allocation up to 85% or 90% after a year or two."

Good stuff all around. What financial advice had I wished I had listened to when I was 20? That's an easy one: 1) Avoid credit card debt like the plague. 2) Invest a little each month in a low cost mutual fund (a great option for younger investors is Vanguard LifeStrategy Growth Fund [VASGX]) via an automatic investment plan.


See also:

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

Start Small

March 30, 2007

You want to start building a mutual fund portfolio, but you don't have the $3,000 or so you need to meet most funds' minimum initial investment requirements. John Waggoner in USA today finds two no-load funds with minimum investments of just $500, one of which, Homestead Value, is a MAXadvisor Favorite:

Excelsior Mid-Cap Value and Restructuring (UMVEX) ($500 min/$250 IRA)

Homestead Value (HOVLX) ($500 min/$250 IRA)

He also reminds us that T.Rowe Price offers entrée to many of their funds for as little as $50 if investors agree to participate in an automatic investment plan, wherein a certain amount is deducted each month from contributor's bank account and invested in the fund.

Buffalo, Artisan, and Weitz (among others) also accept reduced initial investments from automatic investment plan participants.


Note: We're frankly not sure why Waggoner included Hennessy Cornerstone Growth (HFCGX) ($2500 min/$1000 IRA) and USAA Capital Growth (USCGX) ($3000 min/$1000 IRA) in an article about low minimum funds as these fund's minimums are certainly no lower than average. If you can figure it out, let us know by posting a comment.

See also:

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

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