Starter Funds for Youngsters
Investing will a key to the financial security of today's youth. It will be more important to them it was to previous generations. Today's youngsters will rely primarily on their own resources for retirement. The earlier someone starts investing, the easier it will be for him or her to become financially secure.
Yet, financial services firms make it hard for young people to begin saving and investing. Because it costs too much to service small accounts, firms are raising the minimum investing requirement for most accounts. Vanguard generally requires a $3,000 minimum to open a basic account. Discount brokerage firms usually require $2,500 or more to open an account. The trend is for minimums to rise. To get the lowest fees and best services, substantial minimums of at least $100,000 and often more $500,000 are required.
There are a few firms that are hospitable to small dollar investors and are trying to entice younger investors whose accounts will grow over time. Some of these accounts have trade offs in return for their lower minimum investments. The trick is to be sure the trade offs being made are worth obtaining the lower minimum investment requirement.
There are a great many mutual funds that have minimum investments of $250 or so. The problem is that these funds often impose high front-end or back-end loads, 12b-1 fees, high expense ratios or a combination of these fees. The popular American Funds are an example of this approach. The fees are so high that it is difficult for the young investor to earn acceptable net returns.
The front-end loads can be especially onerous for someone who is making regular investments in a dollar cost averaging program. The investor often can choose which fees to pay by selecting the share class in which to invest. In any case, the fees and expenses will be higher than for investments in a no-load mutual fund or those made through a discount broker.
I suspect most young people would be better off avoiding funds with these fees. A better strategy would be to make regular contributions to a bank checking or savings account or certificate of deposit until enough money is accumulated to meet the minimum requirement at a no-load fund family or discount broker.
Another way to gain entry to mutual funds with a modest initial investment is to invest in the all-in-one, target date, or lifestyle funds. These are funds of funds. The mutual fund company puts a diversified collection of its own funds in the lifestyle fund.
These are considered long-term investments. Most fund families have a series of these funds with different maturity dates. The funds are managed for people who plan to retire in the year of maturity. The asset allocation in the fund changes as the target year approaches. Many fund families offer lower minimums for these funds. They expect the funds will be held for decades and that regular investments will be made.
A target date fund often has an extra layer of fees. Another disadvantage is that the allocation might not be what the investor wants. If the young person is saving for a near-term goal, such as the down payment on a home, the allocation might be too aggressive. The asset allocations vary greatly between firms, and a firm can change the allocation at any time.
There also might be additional expenses or loss of benefits. Many of the low minimum funds impose a monthly or quarterly account maintenance fee in addition to regular fund expenses. Also, paper account statements might not be issued and other services might be curtailed.
Fortunately, there are a few quality, independent mutual fund firms that are hospitable to small or young investors.
Hussman Strategic Growth has a minimum initial purchase of only $1,000 and $500 for IRAs. Other funds with only $1,000 minimums are Holland Balanced, Ameristock Fund, the Oakmark funds and Neuberger and Berman funds. The Excelsior funds have only a $500 minimum initial investment.
A conservative young person could purchase Hussman Strategic Growth or Holland Balanced and begin making regular investments. A more aggressive young person who wants to own primarily stocks for the long term can select a fund from one of the other fund families and begin regular investments to continue over the years. Good selections include Ameristock, Oakmark Fund, Oakmark Select, Neuberger & Berman Partners, and Excelsior Value & Restructuring.
It is harder for a young person to begin investing these days, but with a little digging and a careful examination of the trade offs some high quality choices can be located to start the young person on the road to financial independence. October 2007.
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