Kick-Start a Portfolio With Just a Little Cash

How to assemble a team of funds on the cheap.

By SHARE

When times are tough, it can be daunting to come up with enough cash to start—or continue—investing. But even a relatively small amount of seed money can pay off big in the long run: With an initial investment of $1,000 and monthly contributions of just $100, you could cash out with several hundred thousand dollars upon retirement. Here's how to get going with $1,000 or less: 

[See The Best Mutual Funds for 2010.] 

ETFs. Exchange-traded funds, which look like mutual funds but behave like stocks, offer a simple, low-cost way to invest and gain instant diversification. Investors can buy as little as one share of an ETF, whereas mutual funds often require upfront investments of $3,000 or more. Like index funds, most ETFs mirror an index and therefore don't require a manager, so fees are often minuscule (0.53 percent for the average stock ETF, according to Morningstar, although many charge much less). Small investors can theoretically create a diversified portfolio with just two or three ETFs. For example, you might pair iShares Barclays Aggregate Bond Fund (symbol AGG), which covers the spectrum of U.S. investment-grade bonds and charges an annual fee of 0.24 percent, with an ETF representing the entire U.S. stock market, such as Vanguard Total Stock Market (VTI), with a fee of 0.09 percent. Throw in an international fund, and you've got the world covered. 

[See 5 Steps to Set Up an ETF Portfolio.] 

There is one major drawback: ETFs are traded through brokerages, which typically charge a commission every time an investor buys or sells shares. A $7 commission may not sound like much, but trading multiple ETFs—or making periodic contributions—can put a dent in a modest investment. One option is to find a brokerage that charges low commissions, then trade infrequently and hold shares for a long period of time. Free trades aren't unheard of, but they're not common. Brokerage Charles Schwab is now offering a better option for small investors: commission-free trades of its recently introduced ETFs with no minimum balance. They include U.S. large-cap and small-cap funds as well as international ETFs. Fees are low to boot: Schwab's U.S. Broad Market ETF (SCHB), which tracks an index of the largest 2,500 U.S. stocks, charges 0.08 percent in annual fees. 

All-in-one funds. Call it the lazy man's portfolio, but premixed funds offer instant diversification with no hassle. The Vanguard STAR Fund (VGSTX), for example, invests in 11 of Vanguard's stock and bond funds, including Vanguard Long-Term Investment-Grade bond fund (VWESX) and Vanguard International Value stock fund (VTRIX). STAR, which has returned an annualized 5 percent over the past decade and charges an annual fee of 0.32 percent, is Vanguard's only fund that will let investors in for $1,000 (all others require a $3,000 minimum investment). Other fund companies will waive minimums if you agree to contribute regularly. "Think of it as putting your investments on a regular schedule and putting them on autopilot," says Christine Benz, Morningstar's director of personal finance. T. Rowe Price offers more than 90 funds that require nothing upfront—just a commitment to set up an automatic contribution of at least $50 per month. T. Rowe Price Spectrum Growth Fund (PRSGX), which has gained an annualized 3 percent over the past 10 years, offers broad exposure to the market: It's made up of 11 underlying T. Rowe Price stock funds and charges a reasonable annual fee of 0.82 percent. 

Actively managed funds. If you prefer the expertise of a professional stock picker—and are prepared to pay a bit more in annual fees—you can invest in an actively managed fund for as little as $250. For that amount, Pax World Funds offers a menu of socially screened funds, which take into account companies' environmental, social, and governance practices. Pax World Balanced Fund (PAXWX) provides diversification by investing in both U.S. and foreign stocks and bonds and has returned an annualized 3 percent over the past decade, ranking it in the top half of its category. The fund charges an annual fee of 0.95 percent. The Oakmark funds require a $500 minimum if investors agree to set up an automatic investment plan and contribute at least $100 on a monthly or quarterly basis. The flagship Oakmark Fund (OAKMX) is run by veteran manager Bill Nygren and invests in large companies he believes to be undervalued. It has returned an annualized 6 percent over the past 10 years and charges an annual fee of 1.10 percent. For fixed-income investors, Harbor Bond Fund (HABDX) holds a range of securities, including U.S. treasuries, corporate bonds, and foreign bonds. It's managed by PIMCO founder and bond guru Bill Gross and requires a $1,000 investment. Harbor Bond has gained an annualized 7 percent over the past decade and charges an annual fee of 0.55 percent.