Ask MAX: Can I build a fund portfolio with just $17,000?

March 16, 2005

Dear MAX,

I read your article that recommended that investors with less than $15,000 invest in a Vanguard fund. Well, I have $17,000 to invest, and wanted to know how I should invest it. I took your risk quiz and am a moderate investor. Thanks.

St. Albans, Maine

Dear Leena,

You’re referring to this article in which we advised Matthew, a young Navy sailor serving in Iraq, to invest in the Vanguard LifeStrategy Growth fund via an auto-investment plan. Matthew was starting out with just $2,000 (while adding $500 per month), and we told him to invest in this single Vanguard fund because it would give him a high degree of diversification (this particular fund is a collection of funds that owns other Vanguard funds) with a low initial investment requirement.

We told Matthew to stick to the Vanguard LifeStrategy Growth fund until he had grown his portfolio to $15k, then to come back to us to discuss where he should go from there. While the fund has risen more than 5% since Matthew asked his question back in November, we’re pretty sure he hasn’t reached the $15k threshold yet – but we’re guessing he wouldn’t mind if we answer your question in the meantime. You are starting out with more money than Matthew, but you are facing similar problems. Every investor, no matter how much money they are starting out with, should aim for certain goals when building an investment portfolio: diversification, low fees, and the right risk level.

The idea behind diversification is to spread your money into distinctly different investments, so the chances of them all going south at once is pretty remote. Purchasing even a single mutual fund automatically provides a certain level of diversification by taking your money and investing it across all the equities the fund owns. However, true diversification means more than owning 30 energy or tech stocks – besides owning stocks from different industries you need to own stocks and bonds from around the world. Mutual funds make this feasible.

The problem is that diversification can require a fairly large upfront investment – even with mutual funds. Every mutual fund has a minimum investment requirement, a minimum amount of money an investor needs to invest in that fund. Some fund’s minimum investment is just $200 – others won’t let investors in with less than $250,000.

Investors like Matthew who are starting out with a small amount of money have very little choice but to invest in a fund of funds (like Vanguard LifeStrategy Growth), that gives them diversification with a low initial investment requirement because the fund owns other Vanguard bond and stock funds.

An investor like you, with a bit more money to invest, has more options than Matthew, but you still need to be very aware of fund minimums, and to spread your investment money over enough funds to give you a well-diversified portfolio.

Impossible, you say? No, it’s not. It just so happens that our MAXadvisor Newsletter offers a low-dollar portfolio, along with six other higher-minimum portfolios that subscribers can build into their own brokerage accounts.

Currently, the newsletter’s Low Minimum portfolio holds five funds, and can be built with just ten thousand dollars (even less in an IRA account, as some funds lower their minimums for IRA investors). Here is a snapshot of the current allocation to our Low Minimum portfolio, which includes the fund name and ticker symbol, the percentage or the Low Minimum portfolio each holding currently comprises, and the minimum investment of each fund (please keep in mind that these allocations could change at any time):

SSgA MSCI EAFE Index (SSMSX) 10% ($1,000)

Pennsylvania Mutual (PENNX) 20% ($2,000)

Vanguard LifeStrategy Growth (VASGX) 35% ($3,000)

SSgA High Yield Bond (SSHYX) 10% ($1,000)

American Century International Bond (BEGBX) 25% ($2,500)

US stocks: 45%
Non US stocks: 15%
Bonds: 40%

This portfolio covers your whole investing nut, giving investors exposure to foreign equities through the SSgA MSCI EAFE Index fund, and to foreign bonds through the American Century International Bond fund. The Vanguard LifeStrategy Growth fund pops up again to bring large cap stocks to the portfolio party, and Pennsylvania Mutual is a great, lower-fee small cap offering. U.S bonds of various risk levels come from the SSgA High Yield Bond fund and the bond portion of Vanguard LifeStrategy Growth. While this portfolio contains some fairy risky funds, collectively the portfolio is appropriate for a moderate-to-growth investor. The portfolio has returned 10.48% in the last twelve months ending 01/31/05, and 28.49% since inception April 1st, 2002.

While an investor with more money to invest will have access to even cheaper funds and can customize their diversification to a greater degree than investors with less money, the Low Minimum portfolio above proves that you don’t have to be Bill Gates to build a solid mutual fund portfolio.

Thanks for the question. We’re giving you a free subscription to the MAXadvisor Newsletter so you can track our Low Minimum portfolio yourself.


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