Advice for the New Grad

Shortly after writing Taking Aim at Target Funds, I was contacted by Jane Hodges, who was writing a story for the Wall Street Journal. Jane was looking for funds that a new investor should consider for a fledgling portfolio. Naturally, I suggested target-date index funds. How can you beat an investment that is low-cost, extremely diversified, and easy to purchase and maintain?

Her article Advice for the New Grad and the accompanying podcast appeared in the May 2, 2010 On-line Edition of the Wall Street Journal, which also included my suggestions for an investor with limited funds.

I agree with most of the ideas presented by other advisors in the story. Young people, whose greatest ally is time, should lean heavily toward stock market investments. Even so, the need for diversification is still as important as it is for all investors. Since an investor receives exposure to all key asset classes with a small initial investment, index “funds-of-funds”, such as target-date funds, continue to be the best choice in most cases.

Specifically, I suggested the iShares S&P 500 Target Date 2040 ETF, because an investor starting out doesn’t always have the minimum amount required by mutual funds. An ETF can be purchased in small amounts through a discount broker for a nominal transition fee. It is important to keep in mind that there may be account maintenance fees for small accounts at financial institutions. To get around this, a person with just a small amount to invest could use one of the innovative on-line trading services with ultra-low costs.

The Wall Street Journal story was geared toward the new investor, but it’s good advice for any investor with limited resources looking for an easy yet effective way to invest for growth. With graduation time upon us, if you know such a person, do them a favor and forward a link to this helpful and insightful story.