By William Patalon III
Just this week, a friend told me that he wanted to jump-start his long-neglected saving-and-investing efforts, but was worried it wouldn’t be possible on his current household budget.
I’d be willing to bet that a lot of folks are asking that very same question right now.
I mean, let’s face it: Everyone knows how important it is to save money. But in the middle of what may well be the worst U.S. financial crisis since the Great Depression, finding the cash to create an emergency fund – or to invest in a mutual fund that requires a $10,000 initial outlay – can appear so daunting that many investors decide to not even bother.
Don’t that same mistake.
There’s an option: Mutual funds with a low initial investment threshold. We all know, for example, that Vanguard Wellington (VWELX) is a great fund – indeed, it’s a favorite of Money Morning Investment Director Keith Fitz-Gerald – but here in the depths of a financial crisis, not everyone has the $10,000 in cash needed to become a new shareholder.
The upshot: Unfortunately, a lot of folks stop right there, and don’t bother to jump-start their saving-and-investing program.
Don’t that same mistake.
When a Small Start is a Good Start
One way around is to seek mutual funds that allow investors to start with either a very small initial investment – or with no initial investment at all (provided you’re willing to let the fund company take $50 or $100 a month directly out of your checking or savings account).
This approach has a couple of advantages, Money Morning’s Fitz-Gerald says:
- First, it induces you to keep investing, even in a bad market, which history shows is a key element of better long-term results.
- Second, by taking advantage of the electronic-investing option many fund companies offer, you’re investing consistently – for instance, investing the same amount of money on the same day each month.
- Third, for the ultra-cautious the lower investment thresholds can serve as a de facto risk-management tool, since it means that you’re putting less money at risk in the market at a time when the market is uncertain (although, at the same time, you’re still investing).
“It’s a way to insure that you continue to invest, even when the markets stink,” Fitz-Gerald says. “If you are gun-shy, and don’t really want to put a lot of cash at risk, this is a good way to continue your forward-investing momentum, to continue even when the markets aren’t optimum.”
Where do you look for funds like this?
One good place to start your search is with Morningstar, the noted financial-products researcher. For some help, we turned to Morningstar.com’s handy mutual fund screener. And here’s what we did. We looked for funds with an initial purchase of $500 or less. Not wanting big chunks of our capital to for sales commissions, we set the “load” status to “No-Load Funds Only.” And we opted for low-expense offerings, meaning we screened for funds featuring expense ratios of 1.00% or less.
Wanting to cull this further – and to hopefully end up with the “best-in-breed” funds – we limited our search to funds that were rated as “five-star” products by Morningstar.
