The Young Investor's Model Portfolio: Getting Started With ETFs
Beginning the investing process doesn't have to be intimidating. From start to finish, we've constructed easy-to-execute ETF portfolios for new investors.
Investing can be a daunting prospect for a novice, but it doesn't have to be. Exchange-traded funds are straightforward, comprehensive products that can help simplify the investing process for the uninitiated, particularly those in their twenties who have aftertax investable assets for the first time, perhaps from diligent savings or from a year-end bonus. While retirement accounts (401(k), Roth IRA) have their merits, we recommend young investors hold some money in a taxable brokerage account to keep it accessible for potential large expenses, like buying a house or going to grad school. This article explores how new investors can use ETFs to create a balanced portfolio without stress or confusion. We'll discuss what a target asset allocation should be, and how it can be implemented using ETFs on various trading platforms.
Laying the Groundwork
When starting out, new investors should follow two important rules of thumb: keep it cheap, and keep it simple. With a relatively small amount of money to invest, every penny you keep after expenses counts. There's no need to pay a high expense ratio and no reason to rack up costly commissions from your broker by frequently trading stocks. Multiple studies by Morningstar have shown that a fund's expense ratio is a reliable predictor of future success. For the cost-conscious investor, ETFs are the perfect vehicle: on average, ETFs charge a lower expense ratio than mutual funds, and none of the ETFs recommended in our model portfolio cost more than 0.20% a year. At that price, a $5,000 investment would incur $9 in annual fees.
Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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