Years ago, SMI used to consider $25,000 to be the minimum amount needed to implement what was (at the time) our primary investment strategy — Fund Upgrading. For investors with smaller balances, “Getting Started” portfolios were available that showed how to begin Upgrading with less.
We compared those starter portfolios to training wheels on a child’s bike: “They’re helpful to get you up and going, and you feel more secure having them guide you. But eventually you’ll outgrow them.”
That was then. Today, because of our increasing reliance on exchange-traded funds (ETFs) in multiple strategies, including the powerful new Dynamic Asset Allocation strategy, you can get started with as little as $500. This article will show you how.
How to go small
For those who don’t necessarily care about being “hands-on” with their portfolio, the easiest way to start following SMI’s strategies with a small amount of money is to consider the available professionally managed solutions. As little as $50 per month can get you started.
For those wanting a more hands-on approach, there are three factors that impact your ability to use SMI strategies with a relatively small portfolio: how much is required to buy the recommended funds used in the strategy, how much is needed to open an account at a broker where the strategy can be easily implemented, and how much it costs to buy and sell those funds.
Two core SMI portfolio strategies (appropriate for managing your entire portfolio) are especially well suited for small portfolios: Just-the-Basics and Dynamic Asset Allocation. Both use ETFs exclusively, which can be purchased one share at a time (as opposed to traditional mutual funds, which typically require a minimum investment of $1,000 or more per fund). They can both be easily implemented at brokers that require little if anything to open an account. And the trading costs of both are minimal.
Just-the-Basics (JtB) is the easiest and lowest-cost strategy to use in managing a small portfolio. For those allocated 100% to stocks, it uses just three ETFs — a fourth is added if bonds are required. The strategy requires no trading during the year. The only costs you will incur are the commissions for the initial fund purchases, and any commissions to rebalance annually. Better yet, if your account is at Vanguard, even those costs disappear due to the recommended funds being no-fee Vanguard ETFs. However, Vanguard requires a $1,000 minimum to open a brokerage account, so that does raise the bar slightly for getting started with Just-the-Basics there.
(Some readers have been able to avoid the $1,000 minimum requirement when opening a retirement account by using this link. It’s not clear if this is intentional on Vanguard’s part or an oversight, but we have confirmed reports of accounts being set up with as little as what was required to buy one share of each of the ETFs utilized by JtB.)
You can start with even less at TD Ameritrade, which has no minimum for opening a brokerage account. TD Ameritrade charges $9.99 to buy or sell each ETF. However, it offers two of the J-t-B recommended funds without commission and has no-fee alternatives for the other two. (When SMI members go to a specific strategy’s Recommendations tab on the SMI site, clicking on “View alternate funds” will show you funds at each broker that we consider to be adequate alternatives.)
With a small portfolio and an ETF-based strategy, you may not always be able to allocate across the recommended funds in the exact proportions SMI recommends. That’s because you can only buy whole shares and those amounts won’t always line up perfectly with the cash available in your account. The smaller your portfolio, the more of a challenge this can be. Still, even with $500 to work with, you should be able to get close.
For example, Table One shows how a person starting with a $500 portfolio could put about $478 of that to work immediately using the prices of JtB’s three recommended ETFs as of this writing.
Notice that the portfolio’s allocations after making these investments don’t perfectly match the target allocations. That’s okay at this stage. Hopefully, you will add to your account over time. As your account grows and you use new contributions to buy additional shares, it will become easier to bring your allocations closer in line with the ideal.
Dynamic Asset Allocation (DAA) is also very easy and cost-effective to start with a small portfolio, although the commission costs incurred will be somewhat higher because DAA requires some trading throughout the year. DAA tracks six ETFs, investing in the three that currently show the highest momentum. (For a more detailed look at DAA, read, Dynamic Asset Allocation: An Investing Strategy for the Risk-Averse.)
TD Ameritrade is a good place to open a small account to implement DAA, given it has no opening balance minimum requirement and two of the six ETFs used in DAA can be traded for free. A $9.99 commission must be paid to buy or sell the other four ETFs.
Table Two shows how the three DAA funds recommended for May could have been purchased for just over $500, plus commissions.
Again, the portfolio allocations don’t perfectly match the targets initially. As more money is added to the account, this can gradually be smoothed out.
Fund Upgrading requires a higher starting amount to implement it well — roughly $6,500 if your asset allocation calls for 100% stocks, or $7,500 if your allocation includes bonds.
There are two reasons why Upgrading requires a higher dollar amount to begin. First, Upgrading primarily uses traditional mutual funds rather than ETFs, and traditional funds require minimum investment amounts. Those minimums vary by fund, as well as by broker. Schwab tends have the lowest minimums, typically $1,000 if your account is an IRA.
The second reason Upgrading requires a higher starting amount is it splits the portfolio among more investments. For example, a 100% stock Upgrading portfolio would normally be invested in (at least) one fund from each of five stock categories. That’s a minimum of at least five funds. Splitting the portfolio evenly among the five categories might allow an investor to start with as little as $5,000. But as Table Three shows, it would take roughly $6,500 to invest it according to SMI’s 2015 category allocations in order to make sure at least $1,000 is available to meet the fund minimum in each category.
Even with a $6,500 portfolio, some tradeoffs may be necessary. For example, this month's top-ranked recommended fund in Category 2 requires a $2,500 minimum investment at Schwab. The workaround is to choose the second-ranked fund, which as an ETF can be purchased for as little as the cost of one share.
So, while Fund Upgrading can be implemented with as little as $6,500, it clearly becomes easier to execute as your account size grows. It would take $16,000 to invest at least $2,500 in the top-ranked fund from each of the five stock risk categories, while also following SMI’s 2015 category allocations.
It’s never been easier to get started with SMI — just $50 per month for those interested in a managed solution, or roughly $500 for those wanting to take a hands-on approach to implementing Just-the-Basics or Dynamic Asset Allocation. Remember, you don’t have to do it perfectly at first. Getting started with a small dollar amount is a great way to build your knowledge of investing, while also building your net worth at the same time!