Investing for the Not Rich
Merrill Lynch recently announced that they are increasing new client minimums to $250,000. In other words, you will need $250,000 of investable assets to become a Merrill Lynch traditional client (advisors receive smaller payouts for clients with less than the minimum). From a business perspective, the move makes sense as Merrill (owned by Bank of America) looks to boost profitability in their wealth management division to offset losses in other segments. But, what if you don’t have $250,000 lying around? What if you’re just starting to save and invest?
Fortunately, you still have some options.
Your Bank: If you’re saving for your emergency fund (~6 months of expenses), don’t worry about how to invest. Take 1 month and put it in a savings account and the remaining can go into short term CDs. Don’t get caught up comparing returns on various savings accounts (i.e., APY) – remember, it’s an emergency fund and a difference of 1% will amount to less than $200/year. Using your current bank is probably the most convenient
Company Retirement Account: Your Company’s retirement plan (401(K), 403(B), etc.) is the next best spot for your money. You simply tell them how much to take from each check, select your investments within the fund and move on with living life. If you’re new to investing, target date funds (often termed “Lifecycle” or “Target Date” followed by a date that corresponds to your expected retirement) are a great place to start as they give you an appropriate mix of stocks and bonds based on your age.
Vanguard Funds: Vanguard has a longstanding history of supporting the small investor and maintaining low fees. Last year, the company continued that tradition by lowering their minimum on their Target Retirement Fund Series from $3,000 to $1,000. If you don’t have a retirement plan at work, consider Vanguard funds and brokerage services as a low cost option.
Schwab Accounts: Over the past few years, Charles Schwab has made a big push to support the everyday investor (you’ve probably seen the commercials). Most of the company’s brokerage and retirement accounts have a $1,000 minimum and relatively low fees. In addition, the company has significantly improved their online support services with videos, online chats and tons of helpful, easy to follow resources.
Betterment: Technology is changing the world and Betterment is a classic example of how that change is impacting investing. Betterment has removed all the unnecessary complexity from investing and helped the everyday investor focus on the most important question – how much risk are you willing to take? Their system is simple. Signup, move money to your account and set your asset allocation (fancy word for amount of risk you want to take). Betterment does the rest by investing your money is a few funds that match the risk level you selected. The company has no minimums (so you can start with $10), low fees (<.9% for balances below $25,000) and you have anytime access to your money. While some point to the lack of control (you don’t get to choose your investments) as a downside, I believe it’s a great way of protecting yourself from yourself.
Merrill made a clear strategic decision to compete upstream for higher net worth clients. The company found that investors with balances below $250,000 were, on average, unprofitable (i.e., fees did not offset the cost of servicing the client). Fortunately, advancements in technology has lowered the cost to serve the everyday investors and created some innovative new options. If you’re just starting to invest, forget about companies that only focus on the rich – there are a number of established and new organizations that understand your need and are aggressively developing some amazing solutions.
Have you had experiences investing with the companies above? What other options are available for new investors?