With fund investing, you're hiring a professional to pick stocks. If you'd rather make the buy and sell decisions, it's a good idea to bet small with a long-term perspective. Jason Barnette, a 26-year-old software engineer in Arlington, Va., invests in several stocks a year after contributing 10 percent of his salary to a 401(k). He says he's had successes with a few solar and telecommunications stock picks, but there have also been disappointments. "It's easy to become irrational, because you think a company has an expanding business model that will serve it well," says Barnette, who's an avid reader of stock news and also listens to podcasts of PBS's Nightly Business Report during his morning commute. "You have to look a little deeper and try not to get caught up in the hype."
The Set-It-and-Forget-It Portfolio
(Source: Rudy Aguilera of financial-advisory
firm Helios. Chart by USN&WR)
This portfolio covers all the bases: domestic stocks, foreign stocks from both developed and emerging markets, bonds, and a small allocation to gold, which reduces volatility because it moves out of step with the overall market. Exchange-traded funds keep expenses down to just 0.12 percent per year. Of course, you'll need to buy the funds through a discount brokerage. Rudy Aguilera of Helios recommends Zecco, which offers 10 free stock or ETF trades per month with a minimum $2,500 balance.
Funds for a Shoestring Budget
Most actively managed funds require an upfront investment of at least a grand. Here are three choices that won't break the bank:
Pax World Balanced ($250 minimum): Pax, the granddaddy of socially screened mutual funds, avoids companies that derive significant revenue from weapons, gambling, or tobacco and favors those with good track records on issues such as the environment. In one dose, Pax World Balanced offers a diversified portfolio that contains stocks (both foreign and domestic), bonds, and a little cash. The fund, which has gained an average of 7 percentage points per year over the past decade, charges 0.96 percent in annual fees.
Hodges Fund ($250 minimum): A more aggressive fund is Dallas-based Hodges, run by father-and-son team Don and Craig Hodges. The Hodges are a freewheeling pair who invest in companies of all sizes with strong growth prospects. Hefty bets in the energy sector have helped boost the fund to a whopping 25 percent annualized return over the past five years. Annual fees are 1.46 percent.
Homestead Value ($500 minimum): This bargain-hunting fund is still run by the same management team that started it back in 1990. Fundamentally strong large and midsize companies that have hit short-term snags populate Homestead's portfolio. This slow-and-steady fund, which has a 0.71 percent expense ratio, has gained an average of 5 percent a year over the past decade.