A: Congratulations! The fact you're ready to put money in the market means you've learned how to save money, which for many people is the hardest part of becoming an investor.
Now, it's time to figure out how to get started. Many peple let the overwhelming number of investment vehicles, brokerages and mutual funds intimidate them. The array of choices paralyzes some beginning investors.
That's why I suggest you follow just three steps that will get you up and running in no time:
1. Decide what kind of investor you want to be. Do you want to be a long-term, "buy and hold" investor or a trader? Buy-and-hold investors believe that trying to pick the right stocks at the right time repeatedly is a losers' game that results in lots of trading, lost opportunities and mistakes. Buy-and-hold investing takes much less of your time.
Traders, on the other hand, feel that buy-and-hold investors simply put their heads in the sand and endure massive bear markets for average returns. Traders try to minimize losses and maximize gains, but also tend to spend quite a bit of time doing it. If you think you want to trade, it's up to you to read, learn and research investing and trading techniques to make sure you know what you're doing.
2. Choose your investment vehicle. You're either a mutual fund person or a stock and exchange-traded fund (ETF) person. Mutual fund investors like to make dollar-amount investments, sometimes on a monthly basis. You might be a mutual fund investor if, for instance, your goal is to invest $200 a month. Mutual fund companies tend to make the investing process simple. There are also low-cost stock index mutual funds that are ideal for buy-and-hold investors.
Other investors like more control over their portfolios, making stocks and exchange-traded funds more appropriate. If you to want to make bets on specific companies or industry sectors, you'll need to set up a brokerage account. Likewise, if you're a buy-and-hold investor interested in buying index ETFs that trade like stocks, you'll also need a brokerage account.
3. Choose your investment company. If you're a mutual fund investor, you need to choose a fund company to work with. It used to be that some mutual fund companies would cater to investors trying to beat the market while others attracted those hoping to match the market with index funds. But those lines continue to blur. Vanguard Group has long been a leader in low-cost index mutual funds and is still a great choice for many buy-and-hold mutual fund investors. But Fidelity, too, has been aggressive with offering low-cost index funds.
You might decide that while you want to invest in mutual funds, you're willing to pay higher fees for a chance of beating the market. If that's the case, you'll want to use USATODAY.com's mutual fund screener to find funds you like. You can then open an account with the company that sponsors the fund.
If you're interested in trading stocks or ETFs, you need a brokerage firm. There are three main categories of brokerages, deep discounters, discount firms and premium firms.
The deep discounters charge very low commissions, but don't have physical offices. Zecco, TradeKing, SogoTrade are examples. There are also brokerages like BuyandHold.com, Sharebuilder and Folio Investing that cater for investors who want to gradually build diversified portfolios.
Next are discount brokerage firms like Charles Schwab, E-Trade, TD Ameritrade and Scottrade. These firms charge more than the deep-discount brokerages, but offer more advanced websites and may provide advice and physical branches. Several mutual fund companies, including Vanguard, Fidelity and T. Rowe Price, also have compelling discount brokerage units. TradeMonster is a discount brokerages that doesn't offer physical branches, but does provide access to advanced investment tools called options, if you are interested in that.
Finally, there are premium brokerages like Ameriprise, Bank of America and Wells Fargo, which have the highest commissions, but offer the most services and advice. However, Bank of America and Wells Fargo both offer free commissions for customers with large account balances.
Which is the best brokerage for you depends on your style and taste. I recommend logging into each of the websites, looking around a bit, calling some of the firms, and then deciding.
The bottom line. For investors starting out, I have an easy recommendation: Start as a buy-and-hold investor. Create a basic low-cost portfolio of mutual funds or ETFs split between stocks and bonds. If you're 28 years old, you should have 20% to 30% of your portfolio in bonds and the rest in stocks, depending on your appetite for risk.
Then, open an account with a deep-discount or discount brokerage and buy low-cost ETFs that own bonds and stocks. For instance, you might consider putting 70% of your portfolio in the Vanguard Large-Cap US ETF (VV) and the rest in the Vanguard Bond ETF (BND). Another excellent option would be to open a brokerage account with Schwab or Fidelity and buy those companies' zero-commission stock and bond ETFs.
Try this simple portfolio and see how it goes. You might decide this is the right strategy. If so, stick with it. Or you might decide to move toward being a mutual fund investor or more of a trader. In the end, it's up to you.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz
From USA Today published on June 30, 2010