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If you are new to investing and finding ways to grow your wealth, you may be overwhelmed when you learn about what some of the seasoned experts are doing – there are so many options, and the amount of money they have to invest can be intimidating.
Maybe (like most people) you don’t have thousands of dollars just lying around. Fortunately, that should be no hindrance to getting into investing. In fact, you can get a great start in the game by setting aside just $100 per month.
What can you do with $100 per month? Motley Fool contributor Dan Caplinger weighs in, suggesting an index-tracking mutual fund.
Buy into an index-tracking mutual fund
According to Dan Caplinger, $100 is definitely not too small of a start. He recommends an index-tracking mutual fund, with the advantage of maximum diversity for minimal investment. These funds track market indexes such as the S&P 500.1
Kent Thune of TheBalance.com explains these funds as, “a fund that buys and holds most or all of the securities that are in the particular index the fund wants to track.”
These funds are an effort to mirror the growth of major indexes, which trend positive over the long run. In fact, Thune adds, “many investors, including professional money managers, were not able to outperform the major market indices…” Since investors cannot invest in the index itself, the index-tracking fund is the product of an effort to bring them the next best thing.
While mutual fund companies traditionally wanted a $1,000 initial investment to get into their funds, more and more are accepting smaller initial investments as long as you plan to continue to buy into it in installments.
A key advantage to an index-tracking fund is the hands-off, or passive, nature of it. These funds do not require high-pressure decisions to be made by a novice or unsure investor. Instead, investors bring in decent yields while giving themselves the luxury of time to learn more and prepare for more hands-on decisions.
Build a solid foundation in your fund, study what they are investing in and why, and over time you will be prepared to start dipping your toes into investing in individual stocks. This is a great way to safely enter the market! Caplinger recommends you check here to learn more about index-linked funds.2
Choose a Broker.
The first step to take in pursuing this option is to choose a broker. Dayana Yochim of NerdWallet offers some suggestions to narrow this process down.
If you already own a mutual fund, you may want to go with the same company for convenience and streamlining. However, if your broker only has a narrow selection to choose from, you may want to look at a discount broker with more options. Keep trading costs and commissions in mind when making your selection.
Pick an index.
Kent Thune of TheBalance.com offers this straightforward advice, “The best index funds are typically the ones that charge the lowest fees.” But there are other factors to consider.
Additionally, he recommends that you investigate funds for the rate of tracking errors. A fund that successfully achieves its goal of mirroring index performance will have a low tracking error rate. Because this is not a data point that is made publicly available, investors should look to past performance as an indicator.
Taking a Closer Look
James Royal of Bankrate.com lists some index-tracking funds that he believes are worth looking into. While Money Revealed does not specifically endorse or recommend certain funds, these are interesting to look at to help us better understand these funds and what to look for when making investment decisions.
For example, the Fidelity ZERO Large Cap Index (FNILX) follows Fidelity’s U.S. Large Cap Index which mirrors the S&P 500 and has a strong track record in positive performance. Why the term “ZERO”? Because that is the expense ratio: “every $10,000 invested would cost $0 annually.”
Another option to examine is the Schwab S&P 500 Index Fund (SWPPX) offered by Charles Schwab, a name long associated with friendly customer service. This fund has a stunning track record of strong performance going back to 1997. The expense ratio is a low 0.02%.
Finally, take a look at the SPDR S&P 500 ETF Trust (SPY). This is one of the oldest of this kind of fund, dating back to 1993. It is sponsored by State Street Global Advisors, and is one of the largest and most popular of index-tracking funds. The expense ratio comes in a little higher at 0.09%.
Some Final Thoughts
Jason Hall of The Motley Fool sums it up succinctly. “Index investing has become the default wealth-building tool for millions of Americans.”
It’s easy to see why. For the average person, these funds have driven down the cost of investing and improved returns. Aligning a fund with your individual investment goals – both long and short term – is a great way to reap maximum benefit for fledgling investment efforts.
$100 per month is a modest but solid start that will compound over time. Index-tracking funds are historically a safe and sure means for a new investor to get into the market and get a feel for how it works.