The stock market is showing signs of improvement and it seems a rebound may be just around the corner. That means it’s time to consider increasing your 401k contributions and investing any extra cash that’s been sitting on the sidelines for the last few months. It also means you’re faced with the decision of where to invest your hard earned money. Mutual funds are the safe, popular choice, but remember mutual funds are just a collection of stocks, and they sometimes carry very high minimum investment requirements ($1,000 to $25,000) along with commissions, loads, and other annual expenses. The problem many investors face is they want the professional management of mutual funds, but they can’t afford the high price tag after fees and expenses are added in. There’s a way around this problem and it’s possible to “cut out the middle man” and get all the benefits of mutual funds without having to pay the high cost.
First you’ll need to find one or two mutual funds you’d like to purchase. If you don’t already have a fund in mind try referring to the list of the top 25 mutual funds published by Kiplinger each year (the list is available for free at www.kiplinger.com). When you begin researching mutual funds you’ll see the minimum purchase amounts range from about $1,000 to $25,000 per fund. Not many investors can afford these minimums, especially if you’re still in school or just starting your first job. But the opportunity to invest is not lost. Each fund you’re researching is run by a mutual fund manager, and that manager is responsible for deciding what stocks to buy and sell within the fund. You may not have known that what stocks each mutual fund manager buys and sells is public information and is available for free to all investors. In fact, a list of each fund’s holdings can be found on almost any stock research website including www.morningstar.com and www.finance.yahoo.com. The top stock holdings are also listed directly on each fund’s website and in their prospectus, which is the fund’s primary selling document and acts as the fund’s owner’s manual. A prospectus can be requested free of charge directly from each mutual fund company.
Your next step is to research the different stocks owned by the mutual funds to make sure they’re a good fit for your portfolio and meet your investment needs and risk profile. You should then calculate how many shares of each stock you can afford to buy.
Finally, you’ll need to determine how to actually purchase the stocks you want to buy. You can either buy them directly from the parent company or you can open an investment account at a brokerage firm which allows you to trade stocks. For advice on how to open an investment account see my article titled, “Where To Open Your Investment Account."
By purchasing individual stocks instead of mutual funds, you’ll be able to avoid high minimum investment requirements and save on mutual fund expenses and commissions. This strategy is also a great way to learn from the smartest investors for free. Take Warren Buffett’s Berkshire Hathaway fund for example. Just one of his fund’s “A” shares will cost you well over $90,000 (ticker symbol: brk.a). But you can see a list of what stocks his fund owns for free and then purchase those stocks directly for only a few hundred dollars. Of course, you won’t have Warren Buffett’s expertise of knowing exactly when to buy and sell each stock, but you’ll be able to closely copy his investment style without having to break the bank.