How Beginner Investors Can Get Started

This weekend a 25-year old caller with $200 per month to invest asked Bob Brinker how to get started with an investment program.  Bob Brinker suggested the caller contact "Fidelity" and ask about dollar cost averaging into the "Total Stock Market."

This is great advice from Brinker.  I just checked with Fidelity and they said if a new investor sets up the investment into a ROTH or regular IRA with a $200 per month investment, then they will waive the minimums for the index fund. I would recommend the 25-yr old caller put the money into a ROTH. Of course I'm assuming since they only have $2,400 a year to invest they probably meet the ROTH income requirement for 2011 and have ALREADY invested in their 401K at work to take full advantage of any matching. After that, their funds should go to a ROTH IRA.

I often read others suggest using ETFs (exchange traded funds) but those usually come with transaction fees to buy. Some brokerages waive transaction fees if you buy ETFs they sponsor, but they may have a "small account fee" that cancels your savings. 

Someone just starting out needs to be very careful about hidden expenses.  A "small" $4 transaction fee on a $200 investment adds 2.0% to the expense charged by the ETF.

$4.00 / $200.00 x 100% = 2.00%  !!!

Many of the fund companies will let you into their index funds well below the minimum if you sign up for automatic investment.  I did that with Vanguard years before I heard of Brinker.  I set up an account then to invest $2,000 a year into a regular IRA account using excess taxable funds.  I forget the details but I believe I transferred $100 every two weeks  from my checking account to Vanguard until the IRA was full ($2000 max per back then. I was paid every 2 weeks with direct deposit to my checking account.  After that, the funds went to their money market fund until the clock reset for the next year and I could move money to the IRA again.  Schwab will let you buy their very low expense ETFs with no transaction fees but I'm not sure what their fees are for small accounts.

I'd call Fidelity, Vanguard AND Schwab and ask each of them what would be the total cost in each of the first five years to invest $200 a month into their total stock market index fund or a similar ETF.  Tell them you are willing to set up an automatic monthly transfer from your checking account to get the lowest fees.  After 5 years, you should have the $10,000 minimum to get their lowest cost mutual funds.  There is good competition for this type of saver because smart savers usually turn  into very large accounts in the long run.  (Disclosure, I have large accounts at all three but I am not compensated to recommend them other than they may advertise via Google ads on my web sites and blogs.)  Often you can get some fees waived if you can convince them you will move more money to their accounts in the long term and that you will call their competition and go with whomever offers you the overall lowest cost to invest $10,000 over the next five years.

If you are older and want some in stocks and some in fixed income, then don't pay a fee to someone to do it for you.  Bond funds are risky now with the yields so low.  Fees eat up a significant portion of your return even if rates are flat.  Do what I do.   Build it yourself with the fixed portion in a savings account and the equity portion in the total stock market.

ING Direct has a pretty good rate now for savings accounts (1.10%) so you can electronically link between ING and your brokerage account. Then you can move money back and forth easily. I have accounts (CD & Savings) there. I'd shop around at Best Savings Account Rates to find the best rates because they change. Currently, 1.30% at American Express Bank is the best I'm aware of and is what I recommend people use for new savings accounts.

Really good investments for investors just getting started  are John Bogle's two books: 

• Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition
  
  
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

These books offer great advice on how to keep expenses low to maximize your returns.

I do not recommend anyone's newsletter, even mine, until you have at least $10,000 put away in a Total Stock Market index fund and have read these books.  Once you have maybe $50,000 to $100,000, then I think it makes sense to try and beat the market with 20% of the money via managed mutual funds or "do it yourself" perhaps with the aid of "Kirk Lindstrom's Investment Letter."

Bogle on Managed Mutual Funds:

“Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don't be disappointed if the managed fund loses to the index fund in at least one year of every three!)" “The Little Book of Common Sense Investing”, Chapter 18

Bogle on individual stocks for your “Funny Money” account:

“Yes, Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law.”“The Little Book of Common Sense Investing”, pg 202

Good Luck!

Bob Brinker's Municipal Bond Advice

This weekend Bob Brinker started out talking about the mess many of the states of the US are in. He called the politicians in Sacramento, California's capital, dysfunctional.  I agree.  To get elected, the politicians in California gave outrageously excessive pension promises to public unions in exchange for endorsements.

Brinker named the eleven states with triple A  (AAA) credit ratings for their general obligation bonds. The eleven states are

1. Delaware
2. Indiana
3. Maryland
4. Missouri
5. Utah
6. Florida
7. Iowa
8. Minnesota
9. North Carolina
10. Georgia
11. Virginia.

Bottom Line according to Brinker:

"If you are looking at any of those eleven triple A rated states, then you are looking at good paper."

Brinker said states with AA ratings "can be held in a portfolio" if they maintain those ratings. He said he would not worry about owning any of these and he personally owns GO bonds from Virginia and Georgia.

Brinker recommends staying away from these six states:

1. Arizona
2. California
3. Illinois
4. Louisiana
5. New York
6. New Jersey,

• "I would avoid.  I would not purchase in terms of their municipal securities."

Of the double A (AA) rated GO bonds, Brinker said, 

"Generally speaking" of the other 33 states "you are probably OK."

Note, if your money is in a retirement account such as at Vanguard, then the tax savings of Muni bonds do you no good.  

If you have significant funds in a retirement account at Vanguard's prime money fund and don't want to move to another institution (such as mysuggestion to use American Express Savings paying 1.3% APY  in my newsletter), then  I suggest making a ladder of CDs with Vanguard's CD Ladder tool.  Divide the funds into 5 buckets.  Keep 1 bucket (20%) in Prime money fund ready for any buying opportunities (such as a 10% market correction) or potential rebalancing, then put the remaining 80% into CDs for 3, 6, 9 and 12 months.  As the 3,6 and 9 month CDs mature, buy a new 1-YR CD.  After 9 months, you will have four one year CDs with one maturing every quarter.  When interest rates normalize, you can put the CD funds that mature into the total bond fund again. 

You can get an idea what different banks are paying for CDs and savings accounts for various amounts by using the rate tool here.  I use American Express in my newsletters because it is available to everyone and it is "too big to fail."  It is also simple to calculate returns each month for American Express since there are no restrictions to complicate the calculation.   

You can often find better deals with more restrictions such as the 1.3% at Capital One plus 10% bonus and up to $60 credit detailed here, but you have to be a member of Costco.  If you are not a member of Costco, CapitalOne Bank is advertising 1.25% plus a 10% bonus.

Bob's Guest was Perry Mehrling, author of The New Lombard Street: How the Fed Became the Dealer of Last Resort

Perry Mehrling