The Right Buys for New Investors
This article is part of ourBetter Investorseries, in which The Motley Fool goes back to basics to help you improve your returns and be more successful with your investing.
As a small investor just looking to get started with an investing strategy, you may feel like you don't have enough money to make investing worthwhile. But nothing could be further from the truth -- and in fact, there's never been a better time to get started, because you have some great choices that people didn't have just a few short years ago.
Barriers to entry
Go back a few decades, and you practically had to be rich before you could even think about starting to invest. Trading in "odd lots" of less than 100 shares was practically unheard of, so to buy an individual stock, you had to have thousands or even tens of thousands of dollars upfront. Multiply that by the dozen or so stocks you'd want to have in order to build a diversified stock portfolio, and you could easily find yourself pushing $100,000. Moreover, you could find yourself paying commissions of $100 or more to buy each of those stocks.
That's why the rise of the mutual fund was so valuable for investors. Instead of needing a six-figure lump sum, you could get diversified stock exposure with just a few thousand dollars. And although annual fees came out of your returns, the cost of funds paled in comparison to stock commissions.
But now, exchange-traded funds give you the same convenience of buying a stock with the diversification of a fund. And in particular, ETFs available from brokers that offer them at no commission make a great first buy for new investors.
The nice thing about commission-free ETFs is that they've become so widespread. From Firstrade to Scottrade, Fidelity to Vanguard, TD AMERITRADE to Schwab (NYS: SCHW) , and even Interactive Brokers (NAS: IBKR) , discount brokers have figured out that offering commission-free ETFs is a positive for their business model -- because it's become an essential part of helping new investors build up their assets.
At the same time, you don't have to settle for subpar ETF offerings. Many of those brokers have rolled out an impressive array of proprietary in-house ETFs, while some have partnered with well-established ETF industry players in their own right. Many of BlackRock's iShares ETFs are available through Fidelity, and TD AMERITRADE offers more than 100 funds from multiple vendors including iShares, State Street (NYS: STT) , Vanguard, and Invesco's (NYS: IVZ) PowerShares.
The best thing is that with no commission, you don't have to worry about how much money you have to invest. If you want, you can just buy a share at a time. There's no pressure to wait until you have a large chunk of cash available in order to save on commission costs.
Two ETFs to start with
So which ETFs make the most sense for new investors right now? I want to leave you with two ETF ideas.
First, I'm a big fan of dividend stocks. The Vanguard Dividend Appreciation ETF (NYS: VIG) is available commission-free to TD AMERITRADE and Vanguard brokerage customers, and it invests in a wide selection of stocks that have strong track records of increasing their dividend payouts over time. You won't necessarily get the highest yield from them -- that's what the alternative Vanguard High Dividend Yield ETF (NYS: VYM) is for -- but over time, what you will get is a solid portfolio from which you can expect to receive a gradually growing income stream. Similar dividend-oriented ETFs are also available from other providers.
To counterbalance those stocks, though, you'll want to look at bond exposure. iShares Barclays TIPS Bond (NYS: TIP) doesn't have a very attractive yield right now, so it's not something to jump into with all your money. But over time, it offers something most bonds don't: protection from inflation. And its shares are available commission-free to TD AMERITRADE and Fidelity customers. Moreover, you'll find that most brokers offer at least some bond ETFs at no commission.
Jump at the chance
It's great to have an opportunity to put your money to work from day one. Commission-free ETFs accomplish that, with a great combination of accessibility and flexibility that make them ideal for so many investors, even if you're making your first investment. Don't let fears of an inadequate checkbook keep you from starting to invest today!
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At the time this article was published Fool contributor Dan Caplinger remembers the bad old days of full-service brokers. He owns shares of Vanguard Dividend Appreciation. The Motley Fool owns shares of Interactive Brokers Group. Motley Fool newsletter services have recommended buying shares of Interactive Brokers Group, BlackRock, and Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you the perfect start.
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