Can You Start Investing With a Small Amount of Money?
January 25, 2012
Please help. I don't have a clue as to how to invest my small amount of money. Also, I don't understand what people mean by "long term" or "short term" in actual years.
When you're just starting out, investing can seem a bit daunting. And in volatile times like these, with markets moving up and down dramatically, some people might question whether investing is worth the risk. But when it comes to your money, to me the biggest risk of all is doing nothing. So kudos for wanting to get started.
Investing doesn't have to be mysterious. It really comes down to three important factors: What you want, when you want it and how much risk you're willing to take to get it. Knowing these things will help you decide how to proceed.
Think about your goals.
First, think about why you're investing. Do you want to buy a house? Pay for an education? Plan for retirement? Make a list of your goals and when you want to achieve them. You'll find this list a real motivator to keep you saving—and a guide in determining how you will invest.
Determine when you'll need your money.
Your goals will establish what's called your time horizon. If you're young and investing for retirement, you've got plenty of time ahead of you—a long time horizon. If your goal is to buy a house in five years, that's considerably shorter. Just as a very broad guideline, you can think of zero to two years as short term; two to 10 years as medium or intermediate term; and 10 or more years as long term.
Your time horizon is important because, generally speaking, you want safer investments for money you'll need sooner. You can take a bit more risk with money you plan to keep invested for a longer time.
Check your personal risk meter.
Feelings about risk are individual and can be difficult to pin down. Here are some questions that may help you zero in on your own attitudes about how much risk you're willing to take:
- When you invest your money, would you be most concerned about your investment losing value, equally concerned about it losing or gaining value, or most concerned about it gaining value?
- If the overall market lost 25 percent of its value in three months and one of your investments lost the same, would you become frantic? Would you sell all or some of your shares? Or would you be comfortable riding out the dip?
- In terms of the potential for gain and loss, which would be most acceptable to you: an average annual gain of 7 percent with a best-case gain of 15 percent and a worst-case loss of 5 percent, or an average annual gain of 12 percent with a best-case gain of 50 percent and a worst-case loss of 30 percent?
While this isn't an exact science, your answers will help you identify your underlying risk tolerance—and that will help you decide the types of investments you'll be comfortable with over time. This is important because there's always some risk in investing and you don't want to be in a constant state of worry.
Create an investment plan.
This isn't as complicated as it sounds. It basically means deciding how you want to divide your money between stocks, bonds and cash—your asset allocation. Generally speaking, the longer your time horizon and the greater your risk tolerance, the more you can comfortably invest in stocks. For example, if you have an intermediate time horizon and are concerned about risk, you might put a maximum of 40 to 50 percent of your money in stocks and the rest in bonds and cash. If you have a long time horizon and are okay with a taking more risk, you might put as much as 80 percent or more in stocks and the balance in cash. But be sure not to put everything in a single stock or bond. You need to spread your money around—otherwise known as diversification. An easy way to do this with a small amount of money is to invest in a broad-based mutual fund or exchange traded fund, which gives you the benefit of investing in a number of stocks or bonds with one investment. And then, if you add a little every month to your account (a great way to do this is through an automatic fund transfer), you'll be well on your way. Of course diversification cannot ensure a profit or eliminate the risk of investment losses.
To learn more, talk to a friend or family member who is an investor. Go to a brokerage website that includes basic investing information and tools to research investments. Starting small is no problem; in fact, some brokerage firms will allow you to start purchasing mutual funds with as little as $100. The most important thing is to get started—the sooner the better.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.