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The Right Buys for New Investors

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This article is part of our Better Investor series, in which The Motley Fool goes back to basics to help you improve your returns and be more successful with your investing.

As a small investor just looking to get started with an investing strategy, you may feel like you don't have enough money to make investing worthwhile. But nothing could be further from the truth -- and in fact, there's never been a better time to get started, because you have some great choices that people didn't have just a few short years ago.

Barriers to entry
Go back a few decades, and you practically had to be rich before you could even think about starting to invest. Trading in "odd lots" of less than 100 shares was practically unheard of, so to buy an individual stock, you had to have thousands or even tens of thousands of dollars up front. Multiply that by the dozen or so stocks you'd want to have in order to build a diversified stock portfolio, and you could easily find yourself pushing $100,000. Moreover, you could find yourself paying commissions of $100 or more to buy each of those stocks.

That's why the rise of the mutual fund was so valuable for investors. Instead of needing a six-figure lump sum, you could get diversified stock exposure with just a few thousand dollars. And although annual fees came out of your returns, the cost of funds paled in comparison to stock commissions.

But now, exchange-traded funds give you the same convenience of buying a stock with the diversification of a fund. And in particular, ETFs available from brokers that offer them at no commission make a great first buy for new investors.

Why ETFs?
The nice thing about commission-free ETFs is that they've become so widespread. From Firstrade to Scottrade, Fidelity to Vanguard, TD AMERITRADE to Schwab (NYSE: SCHW  ) , and even Interactive Brokers (Nasdaq: IBKR  ) , discount brokers have figured out that offering commission-free ETFs is a positive for their business model -- because it's become an essential part of helping new investors build up their assets.

At the same time, you don't have to settle for subpar ETF offerings. Many of those brokers have rolled out an impressive array of proprietary in-house ETFs, while some have partnered with well-established ETF industry players in their own right. Many of BlackRock's iShares ETFs are available through Fidelity, and TD AMERITRADE offers more than 100 funds from multiple vendors including iShares, State Street (NYSE: STT  ) , Vanguard, and Invesco's (NYSE: IVZ  ) PowerShares.

The best thing is that with no commission, you don't have to worry about how much money you have to invest. If you want, you can just buy a share at a time. There's no pressure to wait until you have a large chunk of cash available in order to save on commission costs.

Two ETFs to start with
So which ETFs make the most sense for new investors right now? I want to leave you with two ETF ideas.

First, I'm a big fan of dividend stocks. The Vanguard Dividend Appreciation ETF (NYSE: VIG  ) is available commission-free to TD AMERITRADE and Vanguard brokerage customers, and it invests in a wide selection of stocks that have strong track records of increasing their dividend payouts over time. You won't necessarily get the highest yield from them -- that's what the alternative Vanguard High Dividend Yield ETF (NYSE: VYM  ) is for -- but over time, what you will get is a solid portfolio from which you can expect to receive a gradually growing income stream. Similar dividend-oriented ETFs are also available from other providers.

To counterbalance those stocks, though, you'll want to look at bond exposure. iShares Barclays TIPS Bond (NYSE: TIP  ) doesn't have a very attractive yield right now, so it's not something to jump into with all your money. But over time, it offers something most bonds don't: protection from inflation. And its shares are available commission-free to TD AMERITRADE and Fidelity customers. Moreover, you'll find that most brokers offer at least some bond ETFs at no commission.

Jump at the chance
It's great to have an opportunity to put your money to work from day one. Commission-free ETFs accomplish that, with a great combination of accessibility and flexibility that make them ideal for so many investors, even if you're making your first investment. Don't let fears of an inadequate checkbook keep you from starting to invest today!

Stay tuned throughout our Better Investor series and get the advice you need to succeed with your investments. Click back to the series intro for links to the entire series.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger remembers the bad old days of full-service brokers. He owns shares of Vanguard Dividend Appreciation. The Motley Fool owns shares of Interactive Brokers Group. Motley Fool newsletter services have recommended buying shares of Interactive Brokers Group, BlackRock, and Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you the perfect start.

Read/Post Comments (3) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2011, at 10:11 PM, TMFBreakerRob wrote:

    I would only disagree with your point about needing lots of money to invest years ago. My first purchase over 40 years ago was to buy a single share of Xerox for around $400. Commissions were higher then than now, but I paid substantially less than a hundred dollars.

    Now, of course, commissions are not as much a factor (if you find a suitable broker) and $400 is still enough to get you started!

    That first buy was at the age of 12 and I was able to retire last year at an early age. Invest early and often....and grab hold of your own financial future! :)

  • Report this Comment On October 12, 2011, at 10:42 PM, pryan37bb wrote:

    "[VIG] is available commission-free to TD Ameritrade and Vanguard brokerage customers, and it invests in a wide selection of stocks that have strong track records of increasing their dividend payouts over time. You won't necessarily get the highest yield from them -- that's what the alternative [VYM] is for -- but over time, what you will get is a solid portfolio from which you can expect to receive a gradually growing income stream."

    I think this point is currently being road-tested by two Fools, but for people with a 20+ year time horizon over which to invest, is dividend growth much more important than high yield? My impression is that dividend growth makes sense for people just about to retire who make a single large investment in, for example, the VIG, and thus their yield-on-cost increases over time as the distributions increase, but in my mind, for someone like myself who will be continually adding to a core position over a long period of time as well as reinvesting the dividends as opposed to living off them, it would make more sense to select high-yield and take advantage of compounding interest earlier and to a greater extent than otherwise possible.

  • Report this Comment On October 13, 2011, at 6:29 PM, DJDynamicNC wrote:

    Pryan - I can't speak for the Fool, but for myself, I invest almost exclusively in dividend bearing stocks, and I'm looking at a 40+ year investing horizon. Sound companies that pay dividends also tend to be stable stocks from stable companies - meaning you aren't necessarily picking dividends OR capital gains, you may be getting both.

    I think a solid dividend stock play now is a great move for the long term. There might be better moves out there for more talented investors, but I've found that I worry much less about my portfolio than my co-workers, because even when the share price drops, I'm still bringing in income - and since I reinvest the dividends, a lowered stock price means I just get more shares out of each dividend payment.

    I'd be eager to hear a contrasting point of view, because there's every possibility my strategy isn't the best, but I'm comfortable with it and it makes logical sense to me, and seems to accord with what the Fool usually seems to point towards. And it gives me peace of mind, which is something that is truly priceless.

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