I love mutual funds. You love mutual funds. They are great all around investment tools and I highly recommend them – especially those low-fee Vanguard funds. However, I’m thinking mutual funds aren’t quite as sexy as they used to be. Yes, my money is slowly drifting to some newer, sultry investments and accounts.
I’ve mentioned it before, but I really enjoy lending on Prosper.com. I made mistakes taking on some loans with way too much risk. However you live and you learn. Prosper is new, so I’d recommend only putting a small amount of your portfolio in it. One great thing about it is that it’s insulated from the stock market. This makes is a very good diversification technique – and it’s especially helpful during times like last week when many stocks were losing money.
One way to invest: If you are looking to make some decent returns with a little bit of money, I suggest the following… Create an account and automatically withdraw some amount of money each week. The minimum is $25 a time, so you can automate with as little as $100 a month. Next creating a standing order for the following criteria, credit grades AA, A, and maybe B loans, auto-funding, low debt-to-income ratio (I choose 25% for mine), and no delinquencies. You’ll have to play with the percentages, but usually there are some AA loans around 13%, so that might be a good starting point. You can always ratchet this up to 15% or more if you find that you have more money to invest and too many loans match. Your next step is sit back and wait… or maybe go on vacation. Money will come into your Prosper account and money will be lent out of your Prosper. There is a risk that you’ll lend money to some crazy guy who says he’s going to build a bomb with it. I think that’s fine. You don’t scrutinize each of the investments in your index-based mutual fund do you? This is the same idea. When you are investing in Prosper though, remember to diversify. I believe no single loan should account for more than 2% of your portfolio. If you sign up through this link they’ll give you $25 for free after you fund your first loan.
A second way to invest: Another great way to invest is to buy exchange traded funds (ETFs) at Zecco.com. Zecco is a game changer for one simple reason – there are no commissions for buying or selling stock (though some limited restrictions apply). With a normal brokerage, you can pay $10 (more or less) to buy and to sell. These commissions make it impractical to investing in a small amounts at a time – your money just goes to pay fees. By eliminating these fees, you can lower those already low fees. For example, you could buy Vanguard’s new Vanguard Europe Pacific ETF (symbol: VEA) which has an 0.15% expense ratio – an extremely small expense for such a broad international fund. ETFs are extremely tax efficient as well.
I haven’t actually opened an account yet with Zecco. I have to focus on paying off a home equity line of credit first. Prosper is enough for me until I’ve gotten that out of the way. I’ve thought about investing in a Zecco IRA despite the fact that there’s a $30 yearly maintenance fee. Since I have a significant amount of money, this would be a great way to re-balance my portfolio on the cheap. The only downside with that is that there’s still the spread between the buy and the ask prices.