18 April 2006

How cash-strapped investors can break into the stock market

The CS Monitor had an article in it's Work/Money section on how cash-strapped investors can break into the stock market. The basics of the article is that unless you have $2,500 to slap into a mutual fund, you're basically locked out of the market.

The savior listed in the article is Sharebuilder. I've used Sharebuilder in the past and it's far from the savior it pretends itself to be. First, the fees are high. $4 per investment, or $14.95 per trade. If you manage to invest $100 per month, you are still paying a 4% commission and need to make that return just to break even. If you save $50 per month, it's an 8% commission, which is the average return for an entire year.

My suggestion would be exactly what the Motley Fool editor suggested in the article, save the money in a taxable high-yield savings account until you accumulate the required minimums to get into an IRA from Fidelity, Vanguard, or any of the other major brokerage houses. You'll get a tax deduction once you accumulate the minimum required, which will more than offset any taxes you'll pay on the interest earned in the savings account.

Additionally, some companies have automatic investment programs to allow you to build up balances gradually. Fidelity requires $200/month, but T. Rowe Price only requires $50/month to be invested in their plan. It requires an automatic deduction from your paycheck or bank account and there are stiff penalities if you stop the automatic contributions.

1 comment:

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