Building a portfolio on a shoestring budget
For as little as $50, you can start buying mutual funds, or for $25, you can start buying individual stocks. Here's how to start your investment portfolio.By Mary Rowland
Not so long ago, brokerages and other financial institutions ruled the investment world. Stocks traded in round lots of 100. Mutual funds regularly raised their investment minimums, locking out the little guy. Small investors needed courage, dedication and ingenuity to get a toehold in the stock market.
No longer. Today it’s as easy to build a portfolio on a shoestring as it is to start investing with a million bucks, thanks chiefly to the changes forced on the investment world by the Internet.
The first time I wrote a column on investing on a shoestring, we focused only on mutual funds because small investors were well advised to stick with funds. Today, investors with as little as $25 a month can buy individual stocks just as easily as mutual funds.
Where to start? Even if you are a beginning investor, think in terms of building a portfolio rather than of buying one or two stocks or a couple of mutual funds. Planning and diversifying will serve you best in the long run.
The sum of all your assets
But what is a portfolio? A portfolio is a collection of investments like stocks, artwork, bonds, gold and real estate. Your portfolio consists of all the assets you own. It represents the choices you’ve made with your money.
Perhaps what you have now is only a portfolio of credit-card debt. Or maybe it’s just $5,000 worth of equity in your home or a pile of battered ski equipment. I remember when my portfolio consisted of one string of pearls. Never mind. It’s not too late to start.
Beginners are usually advised to start with mutual funds because each mutual fund represents a portfolio, too, in this case a portfolio of securities. It might be stocks. Or bonds. Or both. When you look at the prospectus, you’ll find out what the manager buys and what is in the portfolio.
(You can see a fund's top holdings or analyze what's in its portfolio in MSN MoneyCentral's Funds area simply by typing in a fund's symbol or name, like Fidelity Magellan (FMAGX). Then you can select Top Holdings from the black bar on the left side to see what Fidelity's top 10 stocks are, or Portfolio Analysis to get a quick review of how the fund manager allocates his holdings.)
Regular investments -- monthly is best -- are important in building your portfolio. Many good fund groups waive their initial minimum investments -- which might be $10,000 or more -- if you are willing to make regular investments deposited directly from your paycheck or bank account.
Luckily for you, this type of regular, systematic investing is the very best way to invest in the stock market. That’s because it takes advantage of a strategy called dollar-cost averaging, a method of buying stock or mutual fund shares by investing the same amount of money on a regular schedule regardless of the market price. (For more on dollar-cost averaging, see our story, "Dollar-cost averaging offers big sums with small investments.") Studies show that investors who use dollar-cost averaging pay less per share on average than those who purchase shares in a lump sum.
Take emotions out of it
Regular, systematic investing also imposes an important discipline. One of the biggest mistakes novice investors make is buying and selling with their emotions. When the market soars, they buy; when it sinks, they sell, just the opposite of what a successful investor does. Signing up for an automatic investment program puts you on automatic pilot and removes the temptation to try to time the market.
Even though each mutual fund is a portfolio, one fund is rarely enough for an investor. An exception is the Vanguard Total Stock Market Index (VTSMX), which invests in the Wilshire 5000, an index that represents all the stocks that are traded. If you have $3,000 to start and can make subsequent investments of $100 a month, that might be all you need
So let's find some mutual funds that let you start with an initial purchase of as little as $50, but have performed better than most of their competitors and still have relatively low expense ratios.
The last thing you want in a mutual fund is one that takes back much of the profits it makes for you with high expenses. So using the Investment Finder, I start in the "Field Name" and select from the "Expenses" option of the drop-down menu, "Minimum Initial Purchase." In the Operator field, I select the "less than/equal to" symbol and in Value, I choose "Custom Value" and type in 50, for $50.
I continue by asking for the three-year and one-year annualized returns to be as high as possible in two separate steps. As I mentioned, I want to keep expenses low, so I go back to Expenses in the Field Name and select "Expense Ratio" less than or equal to 1, meaning 1%.
I also don't want to pay a front-end load, which is a fee that some mutual funds charge upfront for the privilege of getting to invest with them. I tell the Finder I want only those funds that don't charge a front load. And I want it to be a well-regarded fund, so I choose Morningstar ratings of three stars or higher. The results show a list of funds that include some that are available only if you're an employee of the company, but also several that are available to you or I. The results of my screen are in the link to the left.
Stocks on a shoestring
But many investors have worked up an appetite for individual stocks.
Stocks, too, can be added to your shoestring portfolio. Many companies permit investors to buy stock directly from the company by using the same type of regular monthly investments just described for mutual funds. These programs go by the names of Dividend Reinvestment Plans (DRIPs) or Direct Stock Purchases (DSPs). They're variants on the same theme. (To learn more, check out an earlier column of mine: "How to buy tech stocks DRIP by DRIP.")
The drawback is that many of the most popular technology companies do not participate in these direct investment programs. In addition, many companies have added steep fees to the direct plans.
Now, thanks to the Web, there’s a better way to dollar-cost average into stock. ShareBuilder, a Web-site service that allows investors to buy more than 2,000 stocks as well as several index-based products that trade on the American Stock Exchange for just $2 per trade ($1 per trade for custodial accounts).
This is the best way for small investors to buy one of my favorite indexes, the Nasdaq 100 Trust (QQQ, news, msgs), an index-based unit investment trust. This index buys the 100 largest non-financial stocks on the over-the-counter market. (To learn more about index trusts and what they are, see one of my earlier columns: "Index trusts offer new ways to invest in tech.")
I like the index because it's heavily weighted to technology companies like Intel (INTC, news, msgs), MSN MoneyCentral publisher Microsoft (MSFT, news, msgs), Cisco Systems (CSCO, news, msgs) and Sun Microsystems (SUNW, news, msgs). Yet it also includes some fast-growing retailers like Staples (SPLS, news, msgs), Starbucks (SBUX, news, msgs) and Bed, Bath & Beyond (BBBY, news, msgs) for diversification. I bought it last spring when it was introduced and I recommend it to beginners who can handle the volatility of a tech index.
But because it trades on the American Stock Exchange, investors must pay a commission to buy it, unlike no-load mutual funds, which can be purchased with no fee whatsoever. That commission made it out of reach for the smallest investors. But the ShareBuilder Web site solves that problem with its flat $2 fee.
Although small investors can buy stocks on a shoestring at ShareBuilder, I still recommend a mutual fund or funds (or a similar index-based investment trust) as a core holding. That could be the Standard & Poor’s 500 Index, which is available through the S&P Depositary Receipts (SPY, news, msgs), another unit investment trust like the QQQ known as Spiders. Or it could be the Vanguard Total Stock Market Index (VTSMX), which you'll have to get directly from Vanguard or through a brokerage (and an initial investment of at least $1,000).
Suppose you budget $100 a month for investments and decide to put $50 in an index and $25 in each of two stocks. If you buy each of them every month, it would cost $6.
One way to save on fees is to lump them together. Suppose you put $100 in the index the first month, then $100 in the first stock, $100 in the index, $100 in the second stock, $100 in the index and so on. That way it would cost you just $2 a month or $24 a year to invest $1,200 in a diversified portfolio.
Remember that successful investing requires discipline. It requires a plan. Develop yours and then stick with it.
At the time of publication, Mary Rowland owned or controlled shares in the following equities mentioned in this column: Nasdaq 100 Trust, Microsoft, Intel and Cisco Systems.