Summary: Most funds require a minimum investment of $3,000. But you can invest in several index funds through Betterment, which doesn't have minimum deposits or hidden fees, and makes investing much simpler by selecting several index funds for you.
We’ve come a long way! As a reminder, here is a cheat sheet to remind you of what you can expect from each investment.
You can feel that money burning a hole in your pocket, and want to start investing right away I can tell. Let's look at some of your options as far as brokerages:
Your employer's 401k: Chances are, the investment options provided by your employer's retirement plan are limited and the fees are high (average .71%/person in 2011). However, you should contribute at least as much as your employer will match- something like a 50% match up to 6% of your paycheck. 50% risk-free return in a tax-deferred account? That's a no-brainer.
Chase or Etrade: Not really for longterm investors, these brokerages get away with ridiculous fees, even hidden ones because of their brand name and marketing. I'll be honest, I think these guys are scum that nickel-and-dime naive investors who don't know any better. There are dozens of these sharks out there, and they prey on the rich as well as the poor.
Vanguard or Schwab: Cheaper than most brokerages, but far from beginner-friendly. They need to accentuate the relevant information, hide the less important numbers, and use more graphs. I love Vanguard, but the interface looks like it was made in 1999 by a high school computer geek, and Schwab makes Vanguard look good. Another problem is that most funds require just $3,000 to invest in, a problem for most people with less than $10,000 to play with.
Betterment: This is the best brokerage for beginners. Instead of you having to decide which individual funds to buy, you just decide the ratio of stocks/bonds you want. Your money is then invested Betterment's pool of funds at that ratio, and kept at that ratio. The stocks are all index tracked and diversified across different domestic and international market and passively managed.
Here are two examples of how a $1000 account with a $100 monthly deposit might grow:
100% Stocks- Absurdly volatile, but tax-efficient.
80/20, a much more reasonable asset allocation- notice how much less volatile the projection becomes at only a small cost to theoretical growth.
Here are Betterment's fees, which are quite reasonable for what the service they offer.
The planners will help you understand many of the concepts discussed on this blog but on an intuitive level (e.g. compounding interest, benchmarks, volatility, time-horizons).
My Criticism of Betterment:
Betterment's bond component is very safe: One bond fund composed of 1-3 year treasury bonds and another composed of TIPS. This is too safe and tax-inefficient for my taste. But this is nitpicking- Bonds are for moderating risk, not growth. When the stock market crashes, you can sell your bonds and buy cheap stocks.
The tax efficiency problem can be solved by opening an IRA account and setting that to 100% bonds, though it requires you to spent a few extra minutes with a calculator.
A Funny Story and Some Free Money
I had my parents make Betterment accounts because of their promotion where if you sign up with $500 and keep it invested for 90 days, you get $25 and the referrer gets $10 (You can then just withdraw all your money and never use it again). So I had my parents sign up for 90 days.
Though we got our money, what actually happened surprised me: My mom, who is far from clever ( I don't even know how she ties her shoes without a diagram) learned a lot about investing from using the goal planners.
My dad found the site simple enough to use all on his own: This is a man who once ate my crayon because he thought it was chocolate.
My point is, this site is not only very easy to use, it is even educational. So, here's my referral link if you want the free money. The education you'll get is worth far more but hey, might as well take 25$ if they're giving it away anyway.