Your first investment

If you are a brand new investor the question often comes up “what should my first investment be?”. You can ask lots of people this question and get lots of answers. If I was a new investor today I would purchase a Total Stock Market Index Fund. A total market index fund owns shares of all US based stocks, big and small.

I have accounts with multiple brokerages (I will add a future article about different brokerages) but my primary brokerage currently is Fidelity. In August 2018 they introduced a “Fidelity Zero Total Market Index Fund” (FZROX 9.63 -0.05 -0.52%. The major benefits of FZROX is that there is no commission charge, no loads, no management or expense fees, and no minimums to invest. If you use a different brokerage you can find similar, but there maybe expense fees, so make sure you look at the prospectus before investing.

But why?

Everyday the market is opened, some stocks are going up in value and some are retreating in value. Few of us have the capital necessary to create a good balanced portfolio, but a total market index fund will do it for you. And, should you invest with FZROX, with no fees, 100% of the earnings will be passed to you.

How much?

If I was starting over as a brand new investor, I would suggest putting $2,500 in a total market index fund and then $500 a month each month on the same day of the month (“dollar cost averaging”) until I had $10,000 in that fund. Once I had $10,000 in that fund as a good basis I would start on other investments. If necessary, you can adjust the initial investment as well as the monthly investment to fit your budget, but I would not change the $10,000 amount.

This $10,000 is a wonderful foundation that will provide steady and stable returns most years while you are able to fine tune your investments.

Previous recommendation and, a possible modification to the above recommendation

Before Fidelity released FZROX, I was recommending new investors purchase a no load S&P 500 mutual fund. Since, as I mentioned above, I use Fidelity, I own Fidelity 500 Index Investor (FUSEX 95.26 0.00 0.00%). Most brokerage has something similar.

But why?

The S&P 500, short for the Standard & Poor’s 500, is an index fund of 500 very large companies. It captures approximately 80% coverage of the overall stock market capitalization.

To be part of the S&P 500, a company must have a market capitalization greater than or equal to $6.1 billion as well as several other requirements. These are large, household names. It is a great way to create immediate diversification.

Modified Recommendation

FZROX is a new fund and, rightly so, some are worried about it as it has a short track record. A good solution for that might be to put half of your money in FZROX or a different total market index fund and half in an S&P 500 index fund. If I was starting over as a brand new investor, and I was following this modified recommendation, I would suggest putting $1,250 in an S&P 500 index fund and $1,250 in a total market index fund and then $250 a month each month into each fund ($500 total) on the same day of the month (“dollar cost averaging”) until I had $5,000 in each fund. Once I had $5,000 in that fund as a good basis I would start on other investments. If necessary, you can adjust the initial investment as well as the monthly investment to fit your budget, but I would not change the $10,000 amount.

This $10,000 is a wonderful foundation that will provide steady and stable returns most years while you are able to fine tune your investments.

 

 

This post was originally written on July 26, 2018 and was last modified on September 29, 2018, and is not intended to convey legal, accounting, investing, or other professional advice. I’m not selling anything. I am not a registered stock dealer or broker or anything like it. I’m just sharing ideas I have in stock market investments. My ideas are subject to change at anytime. I have not been compensated in anyway for any of Mike’s Stock Picks.
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