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First Investment?

VENTURING INTO the financial markets for the first time can be daunting, in part because there’s so much choice. Add up the number of individual stocks and mutual funds available in the U.S., and the options are in the tens of thousands. What if we also include all the individual bond issues? Now we’re looking at more than a million different securities.

To make that choice more manageable, try three strategies. First, look to fund your employer’s 401(k) or similar plan. Not only will the plan offer great tax advantages and possibly a matching employer contribution, but also your choice will be far smaller—perhaps two dozen mutual funds. An added bonus: Your employer’s plan won’t have any required investment minimum.

Second, stick with broad market index funds, such as those offered by Fidelity Investments, iShares, Charles Schwab, SPDR and Vanguard Group. If you don’t have much to invest, you might buy the total market index mutual funds offered by Fidelity or Schwab, which have no required investment minimum. Alternatively, you could open an account at a low-cost brokerage firm and purchase exchange-traded index funds from iShares, Schwab, SPDR or Vanguard.

If you’re investing through a regular taxable account, buying a pair of total market index funds that track the U.S. and international stock markets can be an especially smart move. Why? You should be happy to hold both funds for decades, because both should generate minimal taxable gains each year, while delivering returns that match the broad market. In other words, you should never feel compelled to sell because of underperformance or tax inefficiency.

What if you’re investing through a retirement account? Consider the third strategy: Buy a target-date retirement fund that’s built using index funds. Fidelity, Schwab and Vanguard all offer a series of these funds. The Fidelity and Schwab funds have no investment minimum, while Vanguard’s offerings require a $1,000 initial investment. Be warned: Fidelity and Schwab have a second lineup of target-date funds built using actively managed funds—which are costlier and run the risk of sub-par performance.

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