Expert: Gina Boykin - 10/20/2008

Question
My husband and I have never invested beyond my employer’s 401k, and at almost 40 years old we feel it’s way overdue.  The problem is that although we know the basics of investing, we don’t follow the stock market closely in terms of tracking specific stocks and constantly buying / selling, etc.  We’re more interested in setting up a TYPE of portfolio much like I did with my 401k, where we can select a basic allocation structure but not have to go through and pick each individual stock, bond, etc. (although be able to change things out as we watch and become more educated).  Paying a broker for specific consultation is not in the cards right now, as we’re talking about initially investing a very SMALL sum to start, and it doesn’t warrant a broker’s cost at this point.  My question to you is, can we do this (set up a structure and not have to pick each specific stock) on sites like e-Trade or Ameritrade, or is there something else we should do for that kind of set-up?

Answer
It sounds like you're trying to start small and diversify at the same time, without having to spend a lot of time tracking the market.  If you want all of these things, an index fund is your best options.  

An index fund is a mutual fund (which means it holds a very large number of investments) that follows a particular market.  For example, most people know about the S&P 500.  Well, there are S&P 500 index funds, and they hold ALL of the stocks in the S&P500.  That's quite a bit of diversity.  If you want even more diversity, divide your money among two of these funds.  You could do one stock index fund and one bond index fund, or one international fund and one US fund.....There are several index funds to chose from.

Index funds don't need full-service brokers.  Instead they have fund managers, and because they follow an index, they don't need much work from the fund manager, so they are VERY LOW COST.  Mutual funds in general do not have commissions, like you do when you purchase a stock.  However, some do have something called a "load", which is very similar.  Look for no-load funds, and you'll be just fine.

Regarding your investment amount, if you use one of the companies you mentioned, or a similar firm, you can set up automatic investing for as little as $50 a month or quarter (the amount varies by company).  If you chose to do the automatic investing plan, you are signing up to have them transfer money automatically from your bank account.  There are two good reasons to do this.  First, you can't forget or do something else with the money. It forces you to develop the habit of investing.  Second, it allows you to invest without having to meet the firm's minimum required initial deposit.  Sometimes these minimums can be $1,000 - $3,000.