Investing with a Small Amount: Stocks or Mutual Funds?
There was a short Q&A in The Wall Street Journal yesterday where the question being asked is the following:
I would like to buy only a few stocks in certain companies. Are there any online brokers that handle people with only a couple hundred dollars in their account and don’t charge heavy fees for infrequent traders?
While I agree that the brokers mentioned are pretty cheap and don’t charge the so-call inactivity fee for small investors doing sporadic trades, the question I asked myself actually is: if one only has “a couple hundred dollars,” is buying “a few stocks” the best way to invest the money even if he/she goes with Zecco which charges no commission at all?
And my answer is No. If I have only a few hundreds to start investing, I will choose mutual funds over individual stocks because, no matter how good one’s stock picking skill is, the nature of individual stocks is volatile, at least in the short term. With mutual funds, the risk is lowered as one fund can invest in hundreds of stocks at the same time.
Then the problem with investing in mutual funds with a small amount of money is that most funds require a minimum initial investment which could be anywhere between $500 to $3,000 (most of Vanguard’s index funds require $3,000 initial investment). However, there are funds which waive the initial investments if an automatic investment plan is used. For instance, funds from T. Rowe Price don’t require any initial requirement when using their Automatic Asset Builder program with $50 monthly contribution and TRP has quite some good funds to choose from.
If I’d rather deal with a broker than a mutual fund company, I will use a commission-free broker like Zecco (Zecco does require a minimum of $2,500 to open an account though) to buy a low c0st, diversified exchange-traded fund (ETF) such as Vanguard Total Stock Market ETF (VTI) to give me the broad coverage of the stock market.
Though I may not get spectacular return from a mutual fund or ETF, I know my money won’t disappear in hours as could happen with individual stocks.
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