A friend of mine recently approached me and proudly announced, "Jesse, I've decided you are right.
My teacher agrees with what you said.
I should start investing.
I went to my bank and sat down with the investment advisor.
She said I could get started with Fidelity and only pay five percent in fees.
What do you think?" My friend and I had just spoken, very briefly, about investing.
I had suggested to her that, being only 23, it would be a very valuable move for her to start investing some of her money each month.
So, I was pleased that she had really given it some thought and (less than three days later) had done some research and wanted to get started.
So, was the path she had explored her best path? Does she, or any new investor, need the help of an advisor at a cost of five percent? Well frankly, no.
There is a much better path for a novice with very small funds to get started with.
The greatest thing that my friend did was to get started.
Fear of action is what keeps most people out of the markets.
Simply taking the first step is a hugely helpful move.
However, for any new investor, your money will be scarce and precious.
Think of each dollar as a seed that you need to plant and nurture, to later grow into a mighty forest.
In the beginning stages, you can not afford to throw away five percent of your money on fees.
That is the same as killing many of the delicate seedlings that you have worked so hard to start.
The investment advisor is not dishonest, and is doing her best to offer good advice, but she is selling what she knows: industry specific, managed mutual funds.
And to be fair, these can be very useful tools when your investment needs and funds have grown.
However, this is not a great way to get started.
In the beginning, the key is to save.
Don't try to invest with less than $500.
Most brokerages won't even allow you to open an account with less than that.
So, to begin with, save your money.
Once you have enough to open a brokerage account, do so.
Then keep saving.
With such a small amount of money, you should not be investing in sectors yet.
I would suggest starting off with a small investment in the S&P 500 Index Exchange Traded Fund (ETF) symbol SPY.
This is a mutual fund that mirrors the overall market, and can be purchased just like any other stock.
You do not need to pay an extra five percent, just your commission (which can be as low as $1 at some brokerages).
Keep saving by moving money into your account.
As you can, keep buying more and more of the S&P Fund.
Little bit by little bit, you investment foundation will grow.
This ETF is a great start (if you are not going to trade) because it gives you small investments in the 500 biggest stocks in the country.
You don't need an advisor, because you are spreading your money throughout the entire economy to start.
This gives you diversification, and at the same time exposure to the biggest and brightest lights in the market.
This is the best way to start (after fully funding your 401k up to the company match), and it does not require an advisor.
It is not sexy, or super flashy, but it is effective.
It will get you started, and it will save your money, by keeping it out of fees.
This is basically what I advised my friend.
It's good advice.
Try it.
But whatever you do.
Get started now.