3 Solid Investing Options for Younger and Less Confident Investors

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When I graduated from college, I was blessed to be ‘forced’ to do some investing research.  That actually is a great blessing for a young investor.

I took a job with a church who allocated $2,000 per year to retirement.  I wouldn’t directly receive that money, but they would send a monthly check to an investment of my choice.

It was a blessing because it forced me to learn how investing works, investing strategies, and so on.

Many of you, however, are never ‘forced’ to do your research.  The result is that you think, “I’ll start investing later”.  That’s a very poor choice when you’re younger because those early investing years are crucial.

There are also a lot of not so young investors who simply lack confidence.  They’ve heard stories about people losing 50% of their retirement in the market, and they want nothing to do with it. I personally still have confidence in the markets for investments 5 years or longer.

Investing Tips for Younger and Less Confident Investors

1.  Sound Mind Investing Funds or Investing Strategies

Sound Mind Investing is a Christian organization that teaches you about investing and provides you with a lot of easy-to-do investing plans.

As an example, they have something called a Just-The-Basics Strategy.  As a newsletter subscriber, you get access to their suggested asset allocation (something I can’t publicly post).

For example, if you are 25 years old and are willing to have a 100% stock holding, they’ll tell you what percentage of your total investments you should purchase within each fund type, and they’ll suggest specific funds to invest with.  The only problem is that most of the suggestions have a higher minimum purchase amount (+$3,000).

Update: I just found out that SMI is using ETF recommendations as part of their Just-the-basics strategy.  Get more details here.

An alternative for people who will struggle to reach higher minimum investment amounts is to use their fund and asset allocation suggestions and find a comparable Exchange Traded Fund (ETF).  You can find many places that have free ETF purchases. (I use Charles Schwab.) Simply purchase the suggested allocations in the form of an ETF instead of an Index Fund.

Sound Mind Investing also has a mutual fund call SMIFX.  However, I wouldn’t suggest purchasing those shares until you read, understand, and research about the Upgrading Strategy.

2.  Betterment

Betterment is an easy to use and easy to set up investment company.  When you sign up for an account (as a bonus you can actually get $25 when you invest $250 or more), you’ll answer a few customized questions about your time frame until retirement or until you’ll want access to the money.  I signed up just to test their services, and it was extremely simple (but I can’t give a full review yet because I haven’t used it enough).

As a new customer, you’ll need to set up an automatic deposit of at least $100 per month, and you’ll pay a .35% service fee for a balance below $10,000.

Essentially, here’s what happens: you deposit your $100 and they’ll automatically invest it into ETF.  They’ll determine the asset allocation based on the timeframe you have until you need the money.  The longer it is till you need the money, the more aggressive you’ll hold stock funds between small and large capitalization funds.  There are both value and growth funds in the portfolio.

It’s not foolproof, but for a person starting out investing with less than $5,000, it could be hard to find a less hands off, effective, diversified approach to investing without paying many fees.

Of course, you can do all this for yourself without fees.  I buy no fee ETFs from Charles Schwab.  But it takes time to go and enter the market orders, and it might not be worth the time if you have a smaller account balance.  You will want to do appropriate research about asset allocation since that is a huge part of investing.

3.  Target Funds

Target funds are similar to what Betterment is trying to do with less customization.  Let’s say I’m planning to retire in 2040.  I’d buy a 2040 target retirement fund like VFORX.  This particular fund comes with a $1,000 minimum investment and a .19% expense fee.

Once you buy that fund, the powers that be at the mutual fund company will determine what your asset allocation should be and an appropriate balance of a variety of different types of stocks.

Key questions that will help you determine which of these investing options is best:

  1. How much of a hands off option do I want?
  2. How often will I be investing?
  3. Do I understand the basics of the investing world?
  4. How much money do you have to invest?

As a new investor with less than $5,000, my suggestion would be this - just do something.  Any of these three would work well as a younger or newer investor.  With that amount of money you’ll be investing, none of these could be a bad option (compared to doing nothing), and you’ll definitely learn some things along the way.

This post is not investing advice.  If you want investing advice, you should seek out a licensed advisor.  I’m highlighting some of your investing options, but not directing you to purchase any shares in particular.

Can you think of any other suitable investing tips and options for younger and less confident investors?

Comments

  1. says

    My advice would be to go meet with a fee-only financial planner. They have nothing to sell but their expertise, and they can help you implement a plan you can stick with. For whatever reason, many people are too scared or unable to implement an investing plan for themselves. Most fee-only financial planners charge an hourly fee in the $150/hour range and up. I know that sounds high, but it is pennies on the dollar compared to how much most people pay in fees to their broker.

    I understand you are trying to educate and that you are a fan of sound mind investing (I’ve read your previous articles about them), but the fund you mentioned, SMIFX, has a high expense ratio and has underperformed a similar Vanguard Fund since inception. See the following: https://personal.vanguard.com/us/funds/vanguard/compare?navigatingFrom=5. What are your thoughts on this?

    Thanks for the informing article!

    • says

      Oliver for those who are just starting out investing. Say $500 to invest and plan to add $100. Would you suggest that they immediately pay $150 to see an advisor, or should they wait till their investments reach a minimum mount? I’d say someone with $500 to invest would be much better off doing any of the above options than paying $150 for an advisor.

      I’m not sure what ‘similar Vanguard Fund’ you’re mentioning, but if there is a fund that functions the same way and has a lower fee, I’d say go for it.

      • says

        Thanks for the conversation Craig. For someone just beginning to consider investing, I think it would be a good idea to decide if investing is something they are willing to learn about on their own. If so, there are many great books they could check out from the library for free. It is hard to make a blanket suggestion, but yes, for those who have no desire to ever manage their retirement accounts, I think it would be worth sitting down with a fee-only financial advisor for 2 hours. If said person is really struggling to get out of high interest credit card debt, payday loans, etc., maybe they should meet with a financial coach.

        I guess my link didn’t work :). Here are two similar Vangard funds for comparison:

        Name: Vanguard Mid-Cap Growth Index
        Ticker: VMGIX
        Expense Ratio: .24%
        YTD Return: 15.81% (as of 12/31/2012)
        3-Year Return: 12.81%
        5-Year Return: 1.61%

        Name: Vanguard Mid-Cap Growth Fund
        Ticker: VMGRX
        Expense Ratio: .53%
        YTD Return: 14.84% (as of 12/31/2012)
        3-Year Return: 12.89%
        5-Year Return: 3.76%

        Name: Sound Mind Investing Fund
        Ticker: SMIFX
        Expense Ratio: 2.16%
        YTD Return: 10.51% (as of 12/31/2012)
        3-Year Return: 6.78%
        5-Year Return: -0.22%

        Again, not trying to pick on Sound Mind Investing and I have no relationship with Vanguard, but it is hard to beat Vanguard’s funds if you believe in passive index investing (for both returns and expenses).

        • says

          Oliver,
          Thanks for the follow-up.
          The SMIFX fund is quite different than either of the Vanguard funds you mentioned. The difference is that SMIFX uses the Upgrading strategy. I’m not one to defend upgrading but that would be a very different strategy than either of the Vanguard funds you mentioned. Because of the underlining strategy I wouldn’t consider them ‘comparable products’. For someone who is just starting out investing I think either of the Vanguard funds would be a suitable place to start.
          The key is starting and avoiding a lot of upfront fees if you’re a new investor and don’t have a lot to initially invest.

          • says

            Craig,

            I hope I’m not exasperating the subject, but I wanted to continue the discussion. I think there is a lot to learn from it. I’d be happy to continue via email if you would prefer.

            I wasn’t sure what fund upgrading was, so I did a Google search for “fund upgrading sound mind investing.” One of the top few choices from the search was an article from their website. Here is the link: http://www.soundmindinvesting.com/visitors/strat/fund-upgrading.htm.

            Here is the main quote for those who do not wish to read the entire article: “This means we move in and out of funds more frequently than some people are used to, but it has helped us establish a track record of beating the market over an extended period of time, under both bullish and bearish market conditions.”

            So basically sound mind investing is a fan of actively managed mutual funds. Is there anything wrong with that? Absolutedly not! But if you are going to pay a 2.16% expense ratio to own SMIFX, you had better be getting a substantially larger return compared to a lower cost index fund. That was the point of me posting the returns in my above comment.

            Comparing the expense ratios of SMIFX to VMGIX on a $100,000 portfolio, the annual fees for SMIFX would be $2,160 compared to VMGIX of $240. For the yearly spread of $1,920, a person would need the SMIFX fund to outperform a comparable index by a wide margin just to break even. Unfortunately, that is not the case.

            Here’s more proof of why fees (the expense ratios mentioned above) matter:

            http://www.bargaineering.com/articles/expense-ratio.html

            http://www.joshuakennon.com/the-mutual-fund-expense-ratio-matters-a-lot-to-investors-over-the-long-term/

            Why do I think most Christians are much better off with a simple index fund compared to purchasing actively managed mutual funds? Here’s why:

            http://www.forbes.com/sites/rickferri/2012/08/20/index-fund-portfolios-reign-superior/3/

            Thanks again for allowing a valuable discussion!

            Oliver

          • says

            Oliver,
            Thanks for the follow-up.
            I definitely appreciate (and agree with) what you’re saying, but in the end we’re moving away from what I think is the heart of this post. The goal of the post is to say if you’re new or not confident here are a few good choices instead of thousands.
            What you’re correctly pointing out is that things are not so simple and there are many, many other considerations. I agree. For simplicity I wanted to point people in the direction of a few viable options that wouldn’t hurt a person who had a small amount of money to invest.
            I do personally invest in SMIFX and have my reasons, but that’s another discussion for another time. If you do want to ask about that via email I’d be happy to address it, but I think for a person with a few thousand dollars to invest the fees aren’t going to make or break their retirement.

  2. ken says

    Never give control of your YOUR money to someone else. NEVER. Retirement vehicles such as IRA’s, 401k’s, Annuities are nothing more than a scam.

    Tell me, why anyone would entrust 30 to 40 years of their own earnings to an uninsured, untouchable account that charges you fees to buy mutual funds that you could otherwise do on your own? Just to pay ALOT more in taxes later in exchange for a small tax break now?

    You DO NOT need to fund a “college” or “retirement” account and you SHOULD NOT. Do it yourself and keep control of your own money. EVEN IF THE EMPLOYER “MATCHES” your deposits into their “retirement account”. Something for nothing? you must be joking.

      • ken says

        If you have an IRA, you will either be penalized by fees or taxes unless you wait long enough to withdraw your money. In regards to a Roth, why not just invest or save the money on your own without the rules and regs of that Roth?
        It is basically a savings account sitting, waiting for a rewrite in the distribution rules by a broken legislature.
        I dont understand the strong desire of people to fork over their hard earned cash into an acct that charges you to use your money. No tax break or deferment is worth the risk of the implosion of that controller or rewrite of rules that will occur.

        • says

          Ken,
          Thanks for the follow-up. The reason I invest in a Roth is because I won’t pay any taxes when I take the money out. That seems like a wiser choice then saving outside a Roth and risking thousands of extra dollars in taxes at retirement.
          I do agree that the rules can be rewritten at any point, but I personally think the payoff is worth the risk.

          • ken says

            I understand your reasoning and I am glad someone will discuss this topic as most information on “retirement accounts” are just sales jobs.

            I get lost on the Roth argument though, when you realize that yes, you wont be taxed on the principal again, but the future tax rates will obliterate your earnings to about a third of your returns.

            Why not just stay out of a “retirement program” altogether and run your own money completely free from some “vehicle” sold by a broker?

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