Penny-Pinching Strategies for Investing Cheapskates

How to buy into the stock market for pennies on the dollar.

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Bargain hunters and penny pinchers, rejoice. Stocks are cheaper than they've been in decades, which means buying into the slumping market today should pay off big time when it finally bounces back. But don't pour your money into the market blindly: In a dry spell, nickel-and-diming is especially important. That means buying mutual funds and exchange-traded funds that charge low annual fees and taking advantage of tax-sheltered accounts. Here are five ways to get more bang from your investing buck:

Index funds. Listen to old-school cheapskates, such as the Bogleheads--disciples of Vanguard pioneer Jack Bogle—who preach the gospel of index funds. And with good reason: Indexing is an easy way to buy the entire market for pennies on the dollar. Because index funds don't require the services of a stock-picking manager, their fees are typically minimal. Take the Vanguard Total Stock Market Index Fund, which charges an annual fee of 0.15 percent and tracks more than 3,000 stocks of all sizes and in all sectors. Or the SPDR S&P 500 ETF, the annual expenses of which are a cut-rate 0.10 percent.

Exchange-traded funds. These index-fund cousins also mimic indexes, but with a twist: They trade on exchanges like stocks. As an added bonus, ETFs often undercut the fees of index funds. For example, the ETF version of Vanguard Total Stock Market charges just 0.07 percent in annual fees. But charges for trading are the catch: Like stocks, investors buy and sell ETFs through a brokerage, and transaction fees eat away at your returns. That's why discount brokerages are a good bet. Zecco, for example, offers 10 free trades per month for investors who maintain a balance of at least $2,500. And Wells Fargo gives 100 free stock trades per month to investors with at least $25,000 in deposits and loans.

Thrifty active funds. There's nothing wrong with putting faith in a real, live stock picker, but it's especially important to put actively managed funds under the microscope these days. That's because research suggests that low expenses are one of the strongest—if not the strongest—predictor of a mutual fund's future success. According to fund tracker Morningstar, annual expenses for the average actively managed mutual fund hover around 1.4 percent. Ideally, you should look for a fund that charges roughly 1 percent. Use the site's fund screener to turn up highly rated active funds with low expenses. Dodge & Cox Stock Fund, for example, charges just 0.52 percent, the Fairholme Fund charges 1 percent, and the Fidelity Value Discovery Fund charges 0.87 percent.

Boost 401(k) contributions. Retirement-plan contributions, which have the advantage of tax-free growth, seem like a no-brainer—especially when your employer throws in a match. But a survey recently found that amid the economic turmoil, 63 percent of workers have stopped funding their retirement accounts, and an additional 35 percent have reduced their contributions. However, now is actually a good time to be boosting your 401(k) contributions, for the reasons listed above. Try raising your automatic 401(k) paycheck deduction by just a percent or two, and make up for it by cutting down on discretionary expenses. No, you won't get much instant gratification, but consider it a future gift for yourself.