Just about anyone can start investing with $25. Get the best bang for your buck with low cost investing in commission free ETFs.
One of the things that some of my younger relatives ask me is, “Is there a way to start investing for cheap?”
The answer, of course, is, “Yes!”
Thanks to the magic of the Internet, and the fact that there are so many online brokers who want to compete for your investment dollars, it's fairly simple to find the money to start investing. In many cases, you can open an online brokerage account with as little as $25. Once you're in, though, you'll want to get the best bank for your investment dollar.
One way to do that is to invest in commission free ETFs.
Reduce Your Fees for Low Cost Investing
If you want to increase your real returns, you need to reduce the number of fees you are paying. Investment fees can drain away your wealth, and the result is compounded over time. Pay attention to the fees you might be charged, whether you are concerned about your 401(k) costs, or whether you are opening a taxable investment account.
Many online brokers offer low-fee pricing models. You don't have to worry about annual fees or inactivity fees. On top of that, you can often set up an automatic investing plan that offers you a discount on transaction fees. Poke around a little to find brokerages that balance reasonable transaction fees with the tools and research you need to help you make the best investment decisions.
Another tactic is to open an account with a brokerage that offers commission free ETFs. Low cost mutual funds and ETFs are those with low expense ratios. I like ETFs because they trade like stocks while providing the instant diversity associated with a fund. If you have a small amount of money to invest, and you want to take advantage of dollar cost averaging, an ETF can be a good way to go. You can buy partial shares, so set up an automatic investment plan with an online broker and ensure that a set amount of money is invested in an ETF each month.
Where to Find Commission Free ETFs
One of my favorite investment brokerages is Betterment. (You can read my review of Betterment here.) It's where I keep my Roth IRA. However, the commitments you have to make with Betterment might be a little out of range for the beginning investor of limited means. Besides, it is possible to find ETFs with even lower expense ratios when you look on your own. Some ETFs have expense ratios as low as 0.04%.
Add to that the fact that you can find commission free ETFs, and you can really limit the number of fees you are paying. But where do you find these commission free ETFs? The good news is that an increasing number of discount brokerages are offering commission free ETFs. Popular brokerages like E*Trade offer commission free ETFs, and you can find them at other brokers as well:
- Charles Schwab
- Interactive Brokers
- TD Ameritrade
Many of these brokers also offer a selection of commission-free mutual funds. So, if you are more comfortable with “traditional” index funds, you can still get good mileage out of your investment dollar by investing in commission free index funds with relatively low expense ratios.
It's important to note that not all of the ETFs and mutual funds offered at these brokerages are commission free. Usually, only a portion of the ETF offerings come without commissions. Even so, you can usually find enough commission free ETF offerings to build a low cost investing portfolio with the asset allocation you desire.