Content of the material
- What is the best investment for a beginner?
- 4. Take Action
- 2. Use a micro-investing app or robo-advisor
- 10. US Treasury Securities
- What Are the Risks of Investing?
- 3. Controlling emotions
- 6. Diversify
- 4. Invest in Stablecoins on a High-Interest Rate Platform
- What Is Stablecoin?
- About the Author
- What’s the best way to invest small amounts of money?
- 7. Get a Roth (or Traditional) IRA
- Commissions and Fees
- Invest in ETFs
- 6. Open an IRA
- Short-term investments: Safe but lower yield
- Creating a Plan to Invest
- Invest With Little Money or No Money
- What makes a good short-term investment?
- Summary: Tips for investing small amounts
- How to Start Investing Your Money: Develop Your Investing Approach
- Should I use a savings account instead?
What is the best investment for a beginner?
If you’re just getting started, you might want to read our beginner’s guide to investing.
The best investment is one that you feel comfortable with considering your:
- Attitude to risk
ETFs, or exchange-traded funds, are financial products that track the performance of a certain sector of the investment market. You can buy as little as one share of an ETF through a broker, and some of these ETFs track the performance of the total stock market, the bond market, and many others. Many ETFs also pay a dividend, making a purchase in a fund like the Vanguard Total Stock Market ETF (VTI) an instantly diversified portfolio that also pays a dividend.
4. Take Action
Once you’ve gotten a decent handle on the overall market’s activity and analyzed a set of attractively-valued companies you think stand out from the rest, it’s your time to pull the trigger.
Alternatively, as I mentioned in step 3, consider investing in low-cost index fund exchange traded funds through a robo-advisor like M1 Finance, a self-directed broker like Public or a micro-investing app like Acorns.
2. Use a micro-investing app or robo-advisor
Once you have financial emergencies covered, you’re in a much better position to start investing. If you like a fully automated approach that requires as little effort as possible, then a robo-advisor may be just what you’re looking for. Robo-advisors use apps or websites to learn about your financial needs and then come up with an investing strategy to meet them. They’ll often use basic information such as age, family size, income, and risk tolerance to tailor a portfolio to your needs. Robo-advisors then handle all the details of selecting investments, making purchases and sales, and keeping you informed.
You could also use a micro-investing app, which allows investors to put small amounts of money to work over time. For example, a micro-investing app might allow you to round up your credit card purchases to the nearest dollar and invest the difference while also allowing you to deposit funds when you have extra money (like $100) to invest.
10. US Treasury Securities
If you are looking for a more conservative investment, one where your principal is protected from market swings, you can invest in US Treasury Securities.
These are debt obligations issued by the United States Treasury Department, to fund the national debt. Securities have maturities ranging from 30 days to 30 years (longer-term maturities do involve a risk of principal if you sell before maturity).
You can invest in these securities through the US Treasury Department’s portal Treasury Direct. By using the portal, you’ll be able to buy US government securities in denominations as low as $100.
You can sell your securities there as well, and there are no early withdrawal penalties for doing so.
You can also use Treasury Direct to buy Treasury Inflation-Protected Securities (TIPS) too. These not only pay interest, but also make periodic principal adjustments to account for inflation based on changes in the Consumer Price Index.
What Are the Risks of Investing?
Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk: it is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether they are short- or long-term.
3. Controlling emotions
Emotions are a key factor that highly influences an investor’s investing decisions. The chances of making the wrong investment decision increase when investors let their emotions dictate their investing decisions. Hence, it is wise to control your emotions while investing. As losses are a part of long term investing, you should not stop investing as soon as you realise some losses. Knowing that you have invested in good stocks, you should wait, not sell your current positions, and keep investing further.
Diversification is one of the best strategies to mitigate the risks of your investments. When you divide your investments across categories, you also divide the risks associated with the investments. In the case of stock markets, you should diversify your risks across various sectors by allocating a portion of your capital to stocks of specific sectors and investing accordingly.
With diversification, you will not have to worry if a particular stock underperforms. However, diversification should not lead to a bloated portfolio. It is wise to keep a limited number of stocks in your portfolio, as monitoring a large number of stocks can be difficult and won’t let you achieve diversification goals.
4. Invest in Stablecoins on a High-Interest Rate Platform
You may be aware of high-yield savings accounts, where interest rates on your savings could be 10 to 20 times that of your regular bank savings account. That sounds great, but it’s nowhere near what any of the current popular cryptocurrency platforms will give you for your dollar. HYSA interest rates are far outclassed by investing in stablecoin on a trading and lending platform like Blockfi or the Celsius Network.
What Is Stablecoin?
You’ve likely heard of popular and widespread cryptocurrencies like Bitcoin and Ethereum. However, not many people have heard of stablecoins. These are cryptocurrency equivalents of the U.S. dollar. Some of the most popular stablecoins are USDT, USDC, and GUSD, which are from Tether, Coinbase and Gemini.
Since these stablecoins are backed by the U.S. dollar, each coin is backed by one dollar held in reserve. As such, a stablecoin can be converted back to a dollar at any time. There are small fluctuations of one or two cents at times due to changes in liquidity or supply and demand, but they are generally stable.
By keeping stablecoin on trading and lending platforms like Blockfi or Celsius, you can earn up to 10% in interest while investing with relatively little money. That figure approaches the annual return of the S&P 500 over the last decade.
These platforms can afford to pay out such high interest due to their lending rates. They lend out cryptocurrency that users keep on their platform with very high interest rates for the lender, allowing them to then pay out a portion of that interest.
As with all cryptocurrency trading, keeping your money as stablecoin on these platforms should be thought of as investing, not as an HYSA. Keep in mind that you are still converting your dollars to a form of cryptocurrency — that money can be lost on the off-chance that something goes wrong.
About the Author
Brenda Zhang is a technology, finance and game writer with over a decade of writing experience and too many blogs to count. She has worked in biology labs, psychology labs, tech startups and big corporations. A San Francisco-based software engineer by day and an interdisciplinary writer by night, she connects her seemingly unrelated experience in multiple fields to reveal new insights.
What’s the best way to invest small amounts of money?
The stock market is generally a good balance between risk and return as long as you intend to hold onto your investment for at least five years. That’s because although the market moves up and down constantly, it’s always moved in an upward direction in the long term.
Sure, stock market investments are riskier than leaving your cash in a bank account, but they also offer a much higher potential return (historically 6% per year on average — even including all the big downturns, such as the Global Financial Crisis in 2008). So if your goal is to increase your wealth over time, the stock market is an excellent option for investing small amounts of money.
7. Get a Roth (or Traditional) IRA
If you don’t have an employer-sponsored retirement plan, you can almost always set up your own retirement plan. All you need to qualify is earned income.
The two best plans for most people are either a traditional IRA or a Roth IRA. Much like an employer-sponsored retirement plan, any returns on investment that you earn are tax-deferred until you begin withdrawing the funds in retirement.
Also, contributions to a traditional IRA are generally fully tax-deductible.
Roth IRA contributions are not tax-deductible, however, withdrawals will be free from taxes as long as you are at least 59 ½ at the time the withdrawals are made, and you have participated in the plan for at least five years.
Roth IRA’s offer tax-free money at retirement – Holla! 🙌🏼
And though there is no employer matching contribution (since there is no employer), a self-directed traditional or Roth IRA can be held in a brokerage account that offers nearly unlimited investment alternatives.
You can contribute up to $6,000 per year to either a traditional or Roth IRA ($7,000 if you are age 50 or older), which means you can build up a substantial portfolio in just a few years.
Also with the best Roth IRA providers, there is a very low entry cost. Of the investment ideas we’ve offered so far; Betterment, M1 Finance and Fundrise all offer Roth IRA accounts. This is huge for all the small investors out there!
Commissions and Fees
As economists like to say, there ain’t no such thing as a free lunch. Though many brokers have been racing recently to lower or eliminate commissions on trades, and ETFs offer index investing to everyone who can trade with a bare-bones brokerage account, all brokers have to make money from their customers one way or another.
In most cases, your broker will charge a commission every time you trade stock, either through buying or selling. Trading fees range from the low end of $2 per trade but can be as high as $10 for some discount brokers. Some brokers charge no trade commissions at all, but they make up for it in other ways. There are no charitable organizations running brokerage services.
Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a small amount of money available to invest.
Remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades, and you will be charged for each one.
Now, imagine that you decide to buy the stocks of those five companies with your $1,000. To do this, you will incur $50 in trading costs—assuming the fee is $10—which is equivalent to 5% of your $1,000. If you were to fully invest the $1,000, your account would be reduced to $950 after trading costs. This represents a 5% loss before your investments even have a chance to earn.
Should you sell these five stocks, you would once again incur the costs of the trades, which would be another $50. To make the round trip (buying and selling) on these five stocks would cost you $100, or 10% of your initial deposit amount of $1,000. If your investments do not earn enough to cover this, you have lost money just by entering and exiting positions.
If you plan to trade frequently, check out our list of brokers for cost-conscious traders.
Invest in ETFs
Are you thinking of investing in something like a mutual fund so that you can achieve instant diversification? If you don’t have a high initial deposit to make it happen, you may want to consider buying shares of an exchange-traded fund. Unlike mutual funds, which may impose a minimum initial investment, ETFs trade like stocks. They have a specific share price and can be purchased through virtually any broker. With an ETF, you can buy just a couple of shares as long as you have enough money to buy them.
ETFs don’t come without drawbacks. For one thing, you have to purchase whole shares. Second, you’ll typically pay a trading commission each time you make a trade. Since commissions can generally run anywhere from $4.50 to $11, they can quickly eat into your investment. If you purchase ETFs less frequently and with slightly larger amounts of money, you can keep your transaction costs down.
6. Open an IRA
Have an extra $100 you want to invest for retirement above and beyond your company 401(k)? An individual retirement account (IRA) is a great way to go and can turn even small sums of money into a big nest egg over time.
Let’s say that you stash $100 a month in an IRA for 30 years. Based on the S&P 500’s historical performance, the $36,000 you invested would be worth nearly $180,000. That’s the power of compounding gains over time.
Why an IRA? In a word, taxes. With a traditional IRA, you gain similar benefits as with a 401(k), reducing income taxes by cutting your taxable income each year you contribute while also growing your nest egg tax-free until you start taking distributions in retirement.
With a Roth IRA, you get the same tax-free growth as with a traditional IRA. But instead of getting to lower your taxable income each year you make contributions, distributions in retirement are 100% tax-free.
Short-term investments: Safe but lower yield
The safety of short-term investments comes at a cost. You likely won’t be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you’ll be limited to certain types of investments and shouldn’t buy riskier assets such as stocks and stock funds. (But if you can invest for the long term, here’s how to buy stocks.)
Short-term investments do have a couple of advantages, however. They’re often highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all.
Creating a Plan to Invest
Instead of making a traditional portfolio with high- and low-risk investments that are adjusted according to your tolerance and age, the idea is to make your loan payments in the place of low-risk and/or fixed-income investments. This means that you will be seeing “returns” from the lessening of your debt load and interest payments rather than the 2% to 8% return on a bond or similar investment.
The rest of your portfolio should focus on higher-risk, high-return investments like stocks. If your risk tolerance is very low, the bulk of your investing money will still be going toward loan payments, but there will be a percentage that does make it into the market to produce returns for you.
Even if you have a high-risk tolerance, you may not be able to put as much as you'd like into your investment portfolio because, unlike bonds, loans require a certain amount in monthly payments. Your debt load may force you to create a conservative portfolio with most of your money being "invested" in your loans and only a little going into your high-risk and return investments. As the debt gets smaller, you can adjust your distributions accordingly.
Invest With Little Money or No Money
When I first learned to invest, I was working as a Grand Canyon river guide making a whopping $4,000 a year—that’s not a typo.
I lived out of a tent and all of my belongings could fit into a small duffle bag. All that to say…I know what it’s like to try and invest when the price of a single share in many companies is more than you have to spend.
I was about as far away from an “investor” as you can get.
I am living and breathing PROOF that investing is something anyone can succeed at with the right approach, no matter how much or how little money they are starting with.
When you don’t have any money (and you’re trying to change that) you have to step out on a limb. Take some chances, invest the money you do have, and start climbing your way up. Again, everyone has to start from somewhere, and there’s no such thing as not having enough to start with.
What makes a good short-term investment?
Good short-term investments may have many things in common, but they are typically characterized by the following three traits:
- Stability: Good short-term investments don’t fluctuate too much in value, as many stocks and bonds do. The money will be there when you need it, and is often protected by FDIC insurance or a government guarantee.
- Liquidity: A good short-term investment usually offers high liquidity, meaning that you can access the cash invested in it quickly. In the case of certain CDs, you’ll know when the money becomes available, and you can always redeem the CD, though it will often come with a penalty, unless you opt for a no-penalty CD.
- Low transaction costs: A good short-term investment doesn’t cost a lot of money to get into or out of, unlike a house, for example. That’s especially important when yields on short-term investments are at historical lows.
These features mean that your money will not be at risk and will be accessible when you need to use it, which is one of the major reasons to have a short-term investment. In contrast, you can earn a higher return on long-term investments but must endure more short-term volatility. If you need that money, though, you might have to sell at a loss to access it fully.
Summary: Tips for investing small amounts
Let’s say you are looking for the best way to invest CHF 5,000 or a smaller amount. Here are the key points to keep in mind:
- Investing amount: Think about how much you want to invest. If you would like to invest small amounts, consider saving plans and automatic reinvestments.
- Risk profile: Think about how much risk you are comfortable with. Ideally, there should be a balance between the potential of growth and safe investments.
- Choose your stocks: Select your stocks according to your personal values and risk profile. Keep in mind that it is essential to have a well-diversified portfolio. (At Inyova, we take care of this for you!)
- Buy the stocks: Buy the stocks of your choice. Pay close attention to transaction costs and hidden fees!
- Hold: You are now in a great position for long-term growth of your investment.
How to Start Investing Your Money: Develop Your Investing Approach
As I explained this to my brother-in-law, I could see his disappointment in my not knowing any shortcuts to overnight investing success.
However, we launched into a discussion around how he could develop his own disciplined investing approach by first becoming a student of markets.
Knowing that this discussion could become overly cumbersome in just one conversation, I decided to share only introductory steps, which I outline below.
Investing isn’t easy but, at the same time, it shouldn’t be seen as a frightening endeavor. If done wisely and consistently, investing can separate you from retiring comfortably at a reasonable age and working into your golden years out of necessity.
We all want a comfortable retirement, so why shouldn’t we make smart decisions to get there?
With that thinking, I will do the same here. Short of a formal education in finance, my five high-level steps for gaining familiarity with investing in the stock market are as follows:
Should I use a savings account instead?
While it is prudent to have a pot of easily accessible cash in a savings account for emergencies, your money won’t grow beyond the interest offered by the bank.
While leaving your money in a cash savings account may feel like the safest option, the value of your pot is actually being eroded over time. That happens if the interest rate on the account does not keep up with inflation, which is the case with many accounts right now.
If you have more money to invest, read how to invest £10,000