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How to build an investment portfolio with $2,000

US News & World Report -  Money logo US News & World Report - Money 6/28/2019 Rebecca Lake

A brokerage account can be a good way to diversify and start investing, even with smaller amounts of money.

What Is a brokerage account? Simply, it’s a way to purchase stocks, mutual funds and other investments in one place. These accounts are offered by brokerage firms and there are typically no fees involved to open one. There may, however, be a minimum amount required to start investing. With many brokerage accounts, investors need at least $2,000 to start building a portfolio.

Joseph Polakovic, president of Castle West Financial in San Diego, says the key variable for investing with that amount of money is choosing the right brokerage account. When starting with a $2,000 investment or another small amount, consistency trumps everything else.

“The starting amount isn’t as necessary as the discipline it takes to keep it in the account, even if the account is experiencing some volatility,” Polakovic says.

For new investors, there are a few things to keep in mind about how to open a brokerage account and invest their first $2,000.

  • Consider goals and needs.
  • Watch the costs.
  • Start with broad diversification.
  • Aim for tax efficiency.
  • Just start.

Consider Goals and Needs

Fintech companies offer more options to open a brokerage account than ever but younger investors should think carefully before committing their investment dollars.

Choosing a brokerage that integrates traditional investing platforms with financial planning software can help investors target their portfolios to their goals, says Jesse Brown, financial advisor at Signature Estate & Investment Advisors in Houston. He says investors should consider whether a brokerage makes certified financial planners or other investment professionals available to answer questions as a portfolio evolves and grows.

It’s also important to keep investing targets in view to ensure that a brokerage account is suited to achieving those goals.

“If you’re looking to build retirement wealth, then it may be best to use a tax-advantaged account,” Polakovic says. “However, if this account is going to be used to buy a home, pay for a large expense or be used sometime before age 59.5, then a regular brokerage account would be the best option.”

Watch the Costs

Being clear about investing objectives is also important from a cost perspective.

“When you’re asking yourself what type of investor you’re looking to be with it, you need to consider how frequently you think you’ll be trading or changing investments as these changes will usually equate to some type of fee,” says Jordan Sowhangar, Philadelphia-based certified financial planner and wealth advisor at Girard, a division of Univest Investments.

Many brokerage accounts charge a trading fee or commission to buy and sell investments such as stocks and funds. Some may also charge an inactivity fee or annual maintenance fee for accounts. It’s important to evaluate each fee and compare these costs against the account’s features and investment selection to assess whether a specific brokerage option is a good fit.

Additionally, pay attention to the fees associated with underlying investments. With mutual funds, index funds or exchange-traded funds, experts say the key number to focus on is the expense ratio. This figure represents the annual cost of owning a fund, expressed as a percentage of assets. Generally, an expense ratio of 0.75% or lower is optimal for managing costs. If an investor allocates $10,000 annually in a fund with a 0.75% expense ratio that means $75 would go toward those fees.

Again, this is why choosing the right brokerage to open an investment account matters. Vanguard, for instance, offers some of the least expensive fund options, with an average expense ratio of 0.1%. The lower the expense ratio, the better for holding on to returns in a taxable account.

Start with Broad Diversification

Choosing the right funds to include a brokerage account can help with managing costs while offering investors exposure to a good mix of asset classes. Rebecca Novin-Cannon, president of Novin Cannon Financial Group in Montville, New Jersey, favors low-cost, broad-based asset allocation in the form of ETFs. She says this can be a good way to decrease volatility and increase returns.

“Depending on your tolerance for risk, you should hold a diverse array of ETFs,” Novin-Cannon says. That includes large-, mid- and small-cap funds, growth and value funds, bond funds, domestic funds and funds focused on international and emerging markets.

Brown also suggests broad-based index ETFs. “Since this investment is already diversified between the companies in the index, it takes the stress out of having to build your own portfolio with several different investments,” he says. “Once your investments begin to grow over time, then you can additional investments to offer the most diversification.”

A single fund may be sufficient for meeting diversification needs in the early stages.

“When you are first starting out with a limited dollar amount as a new investor it generally makes the most sense to take a ‘less is more’ approach,” Sowhangar says.

Aim for Tax Efficiency

In a brokerage account, investment growth is subject to capital gains tax at the time an investment is sold. The short-term capital gains tax rate applies to investments held for less than one year; the more favorable long-term capital gains rate applies to investments held a year or more.

Understanding the basics of taxation for brokerage accounts is important for ensuring that funds held in the account are as tax efficient as possible. Experts say that ETFs, which typically have less turnover of underlying assets, can meet this need.

Investors may consider splitting their $2,000 initial buy-in between a tax-advantaged and a taxable account if they don’t have both yet. “We don’t know if taxes will go up or down in the future, so dividing the tax burden evenly by paying some taxes now and some later is a practical strategy,” says Casey A. Marx, founder and CEO of Crown Haven Wealth Advisors in Carmel, Indiana. Marx says putting $1,000 into a Roth IRA and the other $1,000 into an after-tax-brokerage account can be a starting point for managing tax liability.

Just Start

The last guideline for opening a brokerage account may be the most important.

“There is so much information out there about investments and investment strategies, it can be paralyzing to first-time investors,” Marx says. “However, how much money you have to invest shouldn’t stop you from starting a portfolio. There are plenty of investment options that allow you to invest as much or as little as you want.”

Delaying can cost investors portfolio growth over the long term.

“Money needs to time to accumulate, accelerate and ultimately take off,” Novin-Cannon says. “We each have only one compound interest curve during our lifetimes and the longer we wait to hop on our curve and start saving, the less take off we experience at the top end.”

Copyright 2019 U.S. News & World Report


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