Investors with $10,000 to $100,000 in savings and investments

Ben Blake, CFP | Portfolio Manager at Parsec Financial
Congratulations! You have made difficult saving and budgeting decisions and you now have enough money saved up to begin investing in your personal brokerage account. Or you recently inherited some money, hit a scratch-off lottery ticket … whatever the case we now want to put this excess cash into investments that will provide for long-term growth of our money. If you have no near-term spending goals and these funds are designated for retirement, then it would be wise to maximize contributions to tax-favored accounts like your employer-provided 401(k). Then you can revisit savings towards personal accounts that will have a slight ongoing “tax-drag” on returns due to the taxation of investment income and capital gains each year.

By now we should understand that we want to have diversified investments in equities to obtain the long-term growth prospects involved with company ownership. We also know that it is important to keep our costs low as we try to achieve this investment goal. A great way to do this is through mutual funds or passively managed exchange-traded funds.

These investment vehicles will spread your money across many hundreds of individual stocks (and charge a small annual percentage fee).

Mutual funds are the traditional vehicle of choice for buying the services of a professional money manager to provide you with immediate diversification across many different individual stocks, as well as continuous monitoring of companies held in the fund to determine whether they should be bought or sold. However, in many cases, these professional managers are unable to select outperforming stocks to justify their high fees.

If you work with a broker you could pay up to 5% “load” fee, which is charged as soon as you purchase the fund, or “back-end load” when you sell the fund. These funds obviously don’t follow our “keep costs low” mantra, so it is important to avoid all mutual funds with any form of “load.”

There are many mutual funds that fall under the “no-load” category that do not charge an entry or exit fee at the time of purchase or sale. These funds make their money primarily off of an annual management fee that is automatically deducted from your investment based on the percentage of assets you hold in the fund. Mutual funds also charge percentage fees involved with “distribution and service fees” aka “12b-1 fees,” and other fees are often hidden from the casual eye paid to other investment firms for trading costs incurred in the fund. Altogether, some mutual funds can charge over 2% each and every year off of your investment!

The easiest solution for immediate diversification with the lowest costs possible is through “exchange-traded funds” aka “ETFs”. These are funds that trade on an exchange like the NYSE and are priced throughout the day as shares exchange hands between buyers and sellers. This contrasts with mutual funds that are only traded at one price determined by the value of the underlying holdings at the end of the stock market trading day.  Certain mutual funds and exchange-traded funds can also fall under the category of “passively managed” funds – meaning that they buy all of the companies that are included in an index (i.e. S&P 500) and just let it ride.

In general, exchange-traded funds are no-load, passive/long-term investments, and have low ongoing management fees, which will be of great use to most young professional investors. Each fund will focus on varying sectors or strategies, so it is important for you to research the management strategy of the ETFs you buy.

Below is a sample portfolio for $10,000 – spread across three low-cost ETFs and with the remaining balance left in the cash option automatically provided by the brokerage firm. Depending on which broker you choose to work with you can determine what ETFs they provide on their platform that are low cost and do not come with trading commissions. The allocation below would be an example of a person with no near-term goals (down payment on a home … knowable near-term expenses (i.e. you’re expecting!) thus someone who is able to invest completely in risky assets and can absorb a temporary price decline (even a significant one).

Description Shares Purchased Share Price Total Value Percentage Weight
U.S. Total Stock Market ETF 145 $53.27 $7,724.15 77.2%
Emerging Markets Index Fund 20 $35.12 $702.40 7.2%
Developed International Index Fund 25 $56.72 $1,418.00 14.2%
Automatic cash option in your brokerage account N/A N/A $155.45 1.5%
  Total Portfolio Value:  $10,000 100%

Notes on each investment choice:

  • U.S. Total Stock Market ETF: Funds in this general category tend to track a broad basket of U.S. companies of all sizes and in all types of businesses. You can obtain diversification to thousands of companies in the U.S. while paying annual management fees to the fund company of less than 0.10% in some cases.
  • Emerging Markets Index Fund: Funds in this category generally attempt to track the MSCI Emerging Markets Index. These funds can provide exposure to hundreds if not thousands of individual stock investments in over 20 “emerging” economies – or those economies that show more rapid growth than developed western economies. The largest holdings tend to be in China, Brazil, South Korea, Taiwan, South Africa and India. Funds in this category generally tend to have higher expense ratios than U.S. market indices but should be below 0.50%.
  • Developed International Index Fund: These funds generally attempt to track the MSCI EAFE Index – or an index that follows stocks in more developed (larger and slower growing) economies in Europe, Australia/Asia and the Far East. This investment type can provide exposure to a broad category of businesses in countries like Japan, U.K., France, Switzerland, Australia and Germany. Expense ratios tend to be somewhere between broad U.S. market index funds and emerging market index funds.
  • Cash: You do not have to do anything to enter into your cash investment. Once you deposit money into your brokerage account it will automatically move into the account’s cash-sweep investment vehicle. In this portfolio, this represents the money left over from what you didn’t use in purchasing the other three investments.

Notice how the portfolio is roughly set in a percentage basis: Roughly 75% U.S. stocks, 15-20% developed foreign stocks, 5-10% foreign emerging stocks, and 0-5% cash. Portfolios of different sizes will require some basic algebra to determine the number of shares to buy based on the asset level to roughly mirror these percentages.

A portfolio made of these types of funds could provide stock investments in more than 3,000 companies of all sizes across the globe. Trading fees could be below $30 and in some cases $0, you will see no annual fees if you chose the correct custodian, and on average, the funds should see an ongoing management fee of less than 0.30% (incredibly low by industry standards). This is a great example of inexpensive and broad diversification amongst some passively managed equity funds.

Each brokerage firm’s site will have detailed tutorials or experts ready to talk and help you navigate where to go to enter the required information to trade in the account. Select the “market order” button when buying or selling, which means immediately place the trade based on the current price instead of a “limit order” which says wait until the price hits a certain mark before you place the trade. One option in the trading screen of note is the “reinvest dividends” button. You can choose to have your broker automatically buy more shares of each fund whenever they pay a dividend – so instead of getting a cash dividend payment, you will just increase the number of shares you own in the fund. Normally it is best to have dividends build up in cash and you can invest those balances as they grow and as you add additional funds to your account.

Remember – the above represents a fictional example of an investor with no near-term goals or one who does not definitely need the money within 10 years or so. If it is the case that you know you need money in several years to meet a goal, then you should make your investments less aggressive. Above we allocated the entire account (excluding a small cash balance) to stocks. If you need to take a more moderate approach to preserve some assets for near-term usage then you can consider adding a fixed-income allocation.

Description Shares Purchased Share Price Total Value Percentage Weight
U.S. Total Stock Market ETF 100 $53.27 $5,327.00 53.3%
Emerging Markets Index Fund 15 $35.12 $526.80 5.3%
Developed International Index Fund 15 $56.72 $850.80 8.5%
Aggregate Bond Fund Index 25 $108.02 $2,700.50 27.0%
Automatic cash option in your brokerage account N/A N/A $594.90 5.9%
  Total Portfolio Value:  $10,000 100%
  • Aggregate Bond Fund Index: This is a type of fixed income exchange-traded fund. These funds can provide exposure to thousands of individual bonds including corporate debt, mortgage-related debt, and U.S. Treasury debt while only charging an annual expense ratio in some cases of below 0.20% annually.

Note in this example we now have a cash and fixed income allocation of about 30-35% worth about $3,300. The fixed-income allocation is still at risk of price declines in the case of rising interest rates and/or declining credit quality, but it is much safer than the stock investments and will likely see less price volatility in the near term. If you have an expense that is several years away, then beginning to build a fixed income allocation for that event is wise. If that event is within 3 years then move more of your risky investments (stocks) into safer investments (cash or fixed income). If the event is within a year or two then you should have the majority of the money required for that event in cash. Once there are no more major events on your horizon it is wise to remember our investment horizons are very long – and near 100% equity allocations are favorable for these time frames!