Upbeat music plays throughout.
Narrator: In this video, we'll walk through how to buy investments for a portfolio. I'll demonstrate how to purchase both a mutual fund and an exchange-traded fund, or ETF, though some investors may prefer one type of fund over the other.
Let's say that this portfolio will consist of four different asset classes: a large-cap domestic stock index fund, an international stock index fund, a small-cap domestic stock index fund, and cash investments.
How much you allocate to each fund will depend on how much time you have until you reach retirement and your overall risk tolerance.
For this video, I'll build a sample portfolio for an investor who is at least 15 years away from retirement.
On-screen text: Disclosure: The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.
Narrator: Our example will be a hypothetical aggressive portfolio consisting of 50% large-cap domestic stocks, 25% international stocks, 20% small-cap domestic stocks, and 5% cash investments. This is just an example, and this allocation may not be appropriate for everyone. Each investor should take their own unique situation into account when making allocation decisions.
On-screen text: Total portfolio times allocation percentage equals allocation dollar amount. Example shows $50,000 times .50 to equal $25,000.
Narrator: Let's say I have $50,000 to invest. To determine the dollar amount to invest in each asset class, I'll multiply $50,000 by the appropriate percentage.
So if this portfolio is going to consist of 50% large-cap domestic stocks, I'll have $25,000 to invest in a large-cap domestic stock fund.
Let's assume I've already used a screener to compile a list of low-fee index mutual funds that I'd like to include in my portfolio and decided which one to purchase.
To buy a mutual fund, I'll point to Trade and select Mutual Funds.
Then, I'll type in the symbol.
For this example, I'll choose an index fund designed to track the S&P 500®.
Under Action, I'll select Buy.
Now, because this a mutual fund, all I have to do is enter the lump sum I want to invest, or for this example, $25,000.
And for this example, I'll choose to reinvest dividends and capital gains.
Then, I'll select Review Order, verify my details, and then select Place Order.
However, if I were investing the same amount of money in a large-cap domestic stock index ETF, the process would be a little different. ETFs trade like stocks. This means that instead of entering the dollar amount I want to invest, I'll have to determine how many shares to buy.
To buy an ETF, I'll point to Trade and select Stocks & ETFs.
Next, I'll type in the symbol of the ETF I want to purchase.
In this case, I'll use an ETF that tracks an index of U.S. large-cap stocks.
Then, I'll select Buy.
According to my allocation, I'm devoting $25,000 to large-cap domestic stocks.
I'll select the calculator to determine how many shares to buy.
Animation: Typing in $25,000 in the calculator to calculate the number of shares.
Narrator: Based on the current price of this ETF, I'll be able to buy 534 shares.
There are many different order types, but for our purposes, I'm going to choose a market order.
A market order places an order for the current price of the security, which is $46.79 in this example.
Now, I'll review my order, then place it.
To purchase the remainder of my aggressive portfolio—to include international and small-cap domestic stocks and cash investments—I'll follow the same process. And that's all I have to do to create my first long-term index fund portfolio.
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