Congratulations, you have finally hit a point financially where you are ready to begin investing. Yet you are concerned because you don’t have more than $50 to $100 to invest each month. How will you be able to meet all those “requirements” for investing and still make good investment decisions? Now instead of being excited that you have extra funds you begin to feel like you can’t invest because it still is not enough.
Stop, before you blow that $50 it is enough money to invest wisely.
The three “requirements” for wise investing that may get in your way are: diversification, asset allocation and finding a place that will let you invest without a big chunk of money to put down. Following is a look at how to solve each of those problems and get you investing today.
Issue 1: Diversification
Diversification is when you attempt to reduce your risk by holding different asset categories and also different types of investments within each asset categories.
- Asset categories examples are: stocks, bonds, real estate, commodities and cash.
- Different types of investments within those categories would be: small stocks, large stocks, corporate and government bonds.
Getting complete diversification can be difficult when you are first starting as you only have so much money to go to different investments. Taking $50 and buying one stock will not allow you to be diversified.
In order to get diversification in each asset category you should use mutual funds as your investment vehicle. Individual stocks or bonds are too hard to get adequate diversification, because you would need at least a dozen stocks to get diversification. This would be hard to do without a lump sum to start investing with. With mutual funds you are able to invest in multiple stocks or bonds immediately, thus gaining instant coverage of an asset category.
Additionally to diversify even more than just a across a specific size of stock, such as large stocks, you should consider investing in funds that will allow you to have access to different sizes of stocks. An example would be a total market index that has small, medium and large firms. Thus you get broad coverage of all stocks.
Issue 2: Asset Allocation Strategy
Asset allocation is how you choose to spread your money across different types of investments in order to reach your goals. Asset allocation is different from diversification in that asset allocation is about what tools you use to achieve your financial goals, and this might not lead you to diversification. For example if you are 21 and saving for retirement you might choose to put all your money in stocks. While you can spread your funds across multiple stocks, your portfolio as a whole won’t be diversified because 100% is in stocks. Thus you don’t have anything to smooth out the down cycles of the stock market.
For now we are going to assume that you do want to be diversified across multiple asset categories. (Sample Asset Allocation Chart)
You can achieve this a few different ways:
- Investing in a balanced fund –a balanced fund holds both stocks and bonds. Typically 60% stocks and 40% bonds.
- Investing in a Lifecycle fund – these are designed to give you a good asset allocation specific for the time frame that you have left to invest. You select the year you want to retire and it adjusts the allocation as you get older. So if you are 21 then you won’t be overly conservative like you would be in a balanced fund.
- You could split your available funds to invest into a stock fund and a bond fund. Let’s say you have $100, you might put $25 into a bond fund and $75 into a stock fund.
- Begin your investing in a 401K. This will allow you to put less than $25 into a given fund, because there are no minimums just percentages of salary and an allocation. If you are taking this option you don’t need to worry about issue 3!
Issue 3: Finding a Low Minimum Investment
Once you have decided how you are going to try to allocate your money into mutual funds you need to select a low minimum investment fund. In order to do this you will need to find a mutual fund that will waive the minimum investment when you set up an automatic investment program.
There are a handful of companies that will waive the minimum if you promise to put money in the fund every month. Some of those companies are T. Rowe price, Homestead and Tiaa-Cref. You can determine if a fund does this a few different ways.
- Morningstar.com - Look at the Purchase Page and then find Initial AIP. I have found that this is not accurate 100% of the time, but is a good place to start.
- Call the company and ask!
- Read the prospectus or the application – you are looking for it to say “Minimum investment waived with automatic investing”
After selecting a fund you want to invest in, go directly to that fund company to open the account. By doing this you avoid the fees and minimums required by a brokerage company, which can be hefty. Most companies will have online applications, or let you download the forms online. Fill out the forms; and you are now officially investing!
- Select mutual funds as your investment tool.
- Find funds that cover multiple asset categories such as balanced funds, life cycle funds or Total market index funds.
- Find a company that allows for automatic investing with no minimums.
- Sign up.
Congratulations, you just set up an investing program that meets the “requirements” and you are on your way to creating wealth!
Andrea Travillian runs Take A Smart Step a site dedicated to personal development, including personal finance, health, career and relationships.