A few low-cost, broad-based funds are all you need to start your portfolio off on the right track. In that spirit, consider these four categories, all ideal for novice investors.
Low minimum. You can get started with $500 or less, in the case of these four funds. Hodges fund (symbol HDPMX) invests in companies of all sizes with improving earnings. It returned 24 percent annualized over the past five years. Excelsior Value & Restructuring (UMBIX) specializes in bargain-priced stocks and companies in the midst of change. It gained 17 percent annualized over the past five years. Homestead Value (HOVLX) looks for undervalued stocks in the U.S., and Homestead International Value (HISIX) searches for undervalued stocks overseas. Homestead Value returned 13 percent annualized over the past five years, and International Value returned 17 percent.
Instant diversification. Pax World Balanced (PAXWX), which recently had 72 percent of assets in stocks and 28 percent in bonds and cash, has a low initial minimum requirement of $250. The fund employs social screens to eliminate firms that invest in alcohol, tobacco, gambling and weapons. It earned 10 percent annualized over the past five years. If you don't care about social screening, consider Oakmark Equity and Income (OAKBX), which recently had 60 percent of assets in undervalued stocks and most of the rest in Treasury bonds. It returned 11 percent annualized over the past five years.
Autopilot solution. Target-retirement funds allow you to pick a fund whose target year matches the date for meeting a goal. As the target year nears, the fund, which invests in other funds in the same family, gradually reduces its risk level by cutting back on stock-fund holdings and moving assets into bond and money-market funds. We think the T. Rowe Price Retirement funds are the best in this category. Their expenses are modest, and they tend to be more stock-heavy than similar funds offered by competitors. Minimum investment is $2,500.
Indexing. There's a lot to be said for just matching the market. That's the beauty of index funds, which seek to mimic a market benchmark. Because the funds are not actively managed, their fees are among the lowest you'll find. Both Fidelity and Vanguard offer low-cost funds that seek to track Standard & Poor's 500-stock index. But if you have little capital, you'll appreciate Schwab S&P 500 Index (SWPIX). Its annual expense ratio of 0.36 percent is high for this kind of fund, but it lets you in for just $100. Schwab also offers low-minimum index funds that track, among other groups, small-company stocks and foreign stocks.