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By Jason Stipp and Christine Benz | 09-08-2014 10:00 AM

Top Starter Funds for Investors on a Shoestring

Morningstar's Christine Benz highlights some of her favorite ETFs and low-minimum-investment funds for new investors.

Jason Stipp: I'm Jason Stipp for Morningstar. Young investors often hear that they should get started with investing and let the power of compounding work for them. But sometimes it's hard to know where to start, especially if you don't have a lot of money to work with. Here to offer some low-minimum starting ideas for those investors is Christine Benz, our director of personal finance.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: So, a low-minimum-investment idea is one where you don't need a lot of money to get into the investment; you have some good ideas for those. But before we get started, let's talk about what investors should think about their company retirement plans because they might want to look there first before they go to some of these ideas?

Benz: Do a little bit of due diligence on your company retirement plan, whether it's a 401(k), 403(b), or a 457 plan. And there are a couple of key reasons to take a look at that first. One is that you may get matching contributions from your employer on your own contribution, so that's a big incentive to take a look at that plan. The other thing is that there aren't any minimums to invest in a 401(k), 403(b), or 457 plan, so that's another thing that can make it very easy for smaller investors to get started. You get automatic dollar-cost averaging, so the money comes out of your paycheck--whether you like it or not--which tends to be a really good way to invest. It fights against some of those behavioral issues that investors can run into.

And another reason I like 401(k) plans as a starting point for beginning investors is that, even though some of the investments might not be very best of breed, they are generally not too kooky either. So, you generally get very broad market index funds, you usually get some target-date funds. Those are all really strong core building blocks for starter portfolios.

Stipp: So, definitely take a look at that company retirement plan. But we do know a lot of folks don't have access to these plans, some folks might not be getting matches, other folks might look at their 401(k) and say, "It's really not that great, and I'm not getting a match." So, for folks like that who want to go out on their own but don't have a lot to get started, you have some low-minimum-investment ideas. What are some of those?

Benz: One of the big ideas--and this has been kind of a breakthrough for investors over the past several years--is that a lot of platforms, a lot of brokerage firms and fund companies, are offering exchange-traded funds without a commission. So, you can buy with a very low initial investment and just gradually add to your position over time as you have the money. So, this is a very investor-friendly breakthrough.

For investors who are looking to go this route, even though there are a lot of more specialized exchange-traded funds that have cropped up, I would recommend just a good broad-market index fund (assuming that it's someone with a fairly long time horizon); a total stock market index fund I think makes a lot of sense in this context.

A couple I would mention would be Vanguard Total Stock Market ETF (VTI) as well as Schwab US Broad Market ETF (SCHB). I would also note that Schwab has a lineup of index funds, and traditional funds--not exchange-traded funds--that are available with just $100 minimums and very low expense ratios. So, that's another place to look if you are a pretty small investor just trying to get a start.

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