Let’s face it: Investing is scary. As such, learning how to start investing is one of those “I’ll do it someday” kinds of life goals.
We millennials are notoriously market-shy, probably because most of us graduated from college during the height of the recession, and thus know first hand what a serious market reversal can do to both personal wealth and the broader economy. A study even found that three out of four millennials are afraid to speak to a financial advisor about money. So what does this leave us with? A group of people, most under 30, who aren’t investing.
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Investing will always involve risk, but it shouldn’t scare you off completely. Investing also doesn’t have to cost a lot of money.
I know more than a few people who refuse to invest because they don’t want to pay ridiculous fees to brokers. In this article, I’ll show you some general strategies and things to focus on so you can start investing without paying a ton of fees. And guess what-you won’t have to talk to any advisors, either.
Note to readers: At Money Under 30, we typically recommend investing your money in low-cost index funds and ETFs. In this post, however, we do mention low-cost brokers for those who wish to try their hand at picking stocks, mutual funds, and other financial assets. If picking individual stocks, we recommend you limit your investment to between 10 and 20 percent of your total portfolio.
General investment strategies
If you want to save money investing, you should stick to low cost ETFs, mutual funds, or my personal recommendation, index funds. Many brokers say that index funds are worse than an actively-managed fund. As Paul Merriman lays out in this article, there are many myths around index funds, many of them coming from brokers.
What you should know, however, is that historically, index funds perform as well as, if not better than, actively managed funds. Other personal finance bloggers J. Money and Philip Taylor both write about the benefits they see in a one-fund investment strategy on their blogs. My advice: Do your own research and determine what’s best for you. But if you want to save money (especially on fees), consider a fund that isn’t actively managed.
Believe it or not, there are some brokers that offer commission-free trades. What you give up with brokers like these are the bells and whistles provided by less bare-bones online brokers-like analyst reports, in-depth data analysis, automatic investments, dividend re-investments, and access to mutual funds. But that’s not to say you can’t do research elsewhere. Loyal3 and Robinhood are new and noteworthy online brokers that both offer unique opportunities.
Loyal3 partners with companies that already have some type of direct investment program, like Starbucks. This means you can buy Starbucks shares directly through Starbucks, without going through a broker at all. Loyal3 acts as a middle man for companies like Starbucks and other companies who offer such programs. By using Loyal3, you can have a single account with multiple investments, and also buy fractional shares of stocks. For example, if you want to own a stock that is $500, you can invest $100 and still get a piece of the pie. Loyal3 uses batch-investing (meaning all trades are executed at the same time each day) which means you may not get the best price, and the investment options are somewhat limited.
Robinhood is another online broker and it allows you to trade over 5,000 stocks and ETFs. They use an easy-to-use app that lets them cut out a lot of overhead. And yes, trading really is free. Robinhood makes money on interest from premium customers’ margin accounts (which can be used to buy stocks on credit) and customers who leave uninvested cash balances in their account. They’ve raised $66 million in funding from different investors, including Snoop Dogg, Jared Leto, and Nas.
While I’ve highlighted a couple of newer brokers that offer completely free trades, you can still get free trades from bigger brokers you may already have an account with. Your options, however, will be limited.
Many online brokers now have lists of ETFs they’ll allow you to invest in without paying a commission. There still may be fees associated with owning the ETF, but you won’t pay anything to purchase it. You may, however, have to pay a fee to sell the ETF within a certain time period. Just make sure to read the fine print.
Charles Schwab has the largest list of commission-free ETFs-over 200-and they claim to not charge any redemption fee for selling the ETF early. They also feature something called the ETF Portfolio Builder, which will help you diversify your ETFs based on the level of risk you wish to take on.
Further reading: The 20 Best Commission-Free Exchange-Traded Funds (ETFs)
No-transaction-fee mutual funds
Many of the bigger online brokers also offer mutual funds with no transaction fees. Keep in mind, this doesn’t mean the funds themselves are free. You’ll still have to pay the fund’s expense ratio, and mutual funds tend to be more expensive than ETFs and index funds. Mutual funds also often have a minimum investment amount.
Brokers will charge you an outrageous fee for funds that don’t fall within their lineup of commission-free funds. You can, however, get a pretty sweet deal on an actively managed fund with companies like Vanguard, Fidelity, or Merrill Edge if you stick to their list of no-transaction-fee (NTF) funds.
Another option to save money on trading fees is to simply choose a low-cost online broker. Many of these brokers now offer as many frills as the larger brokers, just at a lower cost. One of our favorites is Ally Invest-a full-service online broker featuring low cost trades ($4.95 per trade online) as well as $100 in free trade commissions when you open an account. That’s like getting your first 20 trades absolutely free, which might be all you need.