How to Invest With $500 or Less
When I was 14, a friend of mine announced that he had bought a few shares of stock. Our history class had just finished playing a stock market game where most of us, admittedly, performed pitifully. But Dave had caught the bug. He took some of his lawn-mowing money to invest in his favorite place to shop: the Gap (GPS).
If you keep putting off investing because you don't think you have enough money, think again. If a teenager with some loose change and a wad of bills in his pocket can scrape together enough to invest, so can you. You may have to start small, but you can benefit big. One share of Gap stock bought in the spring of 1993 for a mere $3.13 is now worth nearly $22. That's an increase of about 600% without having to lift a finger. Dave's experience proves that you don't need to be rich to invest. But you have to invest to be rich.
No more excuses
With as little as $50, you can buy into a top-notch mutual fund. And you can buy shares of stock for even less than that.
If a 25-year-old invested only $50 a month ($600 a year) and earned an average 10% on her investment, she'd have $316,000 saved by the time she retired. She could have a sweet million if she increased that to just $158 a month (or $1,900 a year). Use this calculator to see how far your investments can take you over time.
Whether you have $50, $100 or $500, make sure you pass this three-part financial test before plunking it down on any investment:
Do you have an emergency cash fund? You should have enough set aside to cover three to six months of expenses. You don't need to have all six before you start investing, but you should shoot for at least two or three. Then allocate a fixed amount every month toward your emergency stash to build it up.
Are you participating in your employer's 401(k) plan? If your employer offers a match on your contributions, make sure you invest as much as you can to take advantage of it. For example, a 50-cent match for every dollar you contribute nets you a 50% return on your investment. You can't beat that.
Have you paid off your high-interest debt? If you have $500 on a credit card charging 18% interest, paying it off is like getting an 18% return on your investment -- it's hard to get that kind of return on the stock market.
Once you've taken care of those three areas, you can look for other ways to invest your extra money. Your goals for how and when you want to use your money will mold your strategy. (Learn more about how to invest to meet different goals.) But because you're young, let's assume you're investing for the long-term.
A good place to start is a Roth IRA. This retirement account allows you to sock away up to $4,000 this year, and you don't pay taxes on your earnings (you contribute your money after you've already paid taxes on it). The drawback: You generally can't touch your earnings until retirement (unless you want to pay a penalty). There are a few exceptions, however, such as buying your first home. You can withdraw your contributions at any time, though, just not your earnings.
You can invest in a variety of assets for your IRA: stocks, bonds, mutual funds, real estate, annuities, CDs, etc. You'll probably want to stick with stocks and mutual funds at first, though, because they have the highest returns over the long haul and they're relatively simple to manage. After you've taken advantage of tax-sheltered investment accounts, you can also set up a regular investment account, where you have to pay taxes on any gains when you sell.
Dip into the mutual fund pool
Mutual funds are a shoestring investor's best friend. If you've ever pooled your money with your friends to buy a few pizzas and drinks, you understand the concept of mutual funds. They combine several investors' money to buy a variety of stocks that may be too expensive for the individual to purchase alone. This allows you to diversify your investments (you can get pepperoni, ham and pineapple, plus sausage and olives) while keeping costs low.
Most fund companies, however, require a minimum investment to get started, typically between $1,000 and $3,000. But the minimums to buy a fund for your IRA are usually lower. You can find several top-notch funds for your retirement account for as little as $250 to $500.
A handful of fund companies, including T. Rowe Price, TIAA-CREF and Scudder will even let you in for a measly $50 if you contribute that amount each month automatically from your bank account. Investing at regular intervals -- a trick called dollar-cost-averaging -- is a good idea no matter what amount you can afford, because over time it helps smooth out the volatility of the market on your portfolio.
You can use Kiplinger's Fund Finder to sort through mutual funds with low minimum investments that meet your individual criteria. Stick to no-load funds with low expense ratios (the average expense ratio for stock funds is about 1.5%). Here are a few suggestions to get you started:
Selected American Shares (SLASX) invests in large undervalued companies and consistently outperforms the S&P 500 index. Requires $250 to open up an IRA. Returned 9.3% over the past year, an annualized 7.9% over the past three years, and 14.5% over the past ten.
Homestead Value (HOVLX) invests in beaten-up shares of large and medium-sized companies. Requires $200 for IRAs. Returned 13.5% over the past year, an annualized 8% over the past three years, and 11.4% over the past 10.
T. Rowe Price Spectrum Growth (PRSGX) invests in ten other T. Rowe Price stock funds, giving you a good mix of stocks in small companies and foreign firms, as well as large companies. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 10.7% over the past year, an annualized 7.1% over the past three years and 10.9% over the past ten.
T. Rowe Price Equity Index 500 (PREIX) invests in stocks to mirror performance of the S&P 500 index. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 6.7% over the past year, an annualized 4.4% over the past three years and 11% over the past ten.
You can buy funds directly from the fund company or through a broker.
With a mutual fund, you're basically hiring a professional to manage your money and pick stocks for you that fit into the fund's particular style. With just one fund, you can own dozens of stocks so you're not betting the farm on the performance of one company (think Enron). Plus, everyone that owns the fund, no matter how much or how little they have invested, gets the same manager, investments and return.
If you still can't meet a fund's minimum or you'd rather not commit to a $50 or $100 a purchase each month, you can still get started by investing in a diversified basket of stocks called an exchange-traded fund. ETFs mirror the performance of a market index. So-called "Spider" shares (SPY), for example, mimic the S&P 500, and iShares Russell 2000 (IWM) imitates the index that tracks stocks of smaller companies. (View a list of available ETFs.) ETFs, however, are traded like stocks, so you'll need a broker. We'll talk about how to find one and invest in stocks next.
Stock up on stocks
If you're one of those people who would like to research individual investments yourself and you want to be in control of when you buy and sell certain holdings, you might consider investing directly in stocks.
First, you'll want to learn how to build a solid stock portfolio, and what to look for when evaluating individual socks.
Then, you'll probably need to get a broker. Unfortunately, most brokers also require a minimum investment to open an account, which can run anywhere from $1,000 to $25,000. Discount broker Muriel Siebert, however, doesn't require a minimum investment to get started. E*Trade waives its minimum investment requirement if you're opening an IRA, and Scottrade requires only $500 to open an account. Find the best discount broker for your needs and compare their fees and features.
With a broker, you pay a commission each time you buy or sell, which typically costs between $10 and $40. This can make dollar cost averaging a tad expensive if you want to invest a regular amount, say, every month. So you may have to scale back the frequency to four times a year or less. Plus, you typically can't buy fractional shares of a company through a broker. If you wanted to buy a single share of Berkshire Hathaway (BRK), for example, you'd need to scrape together $90,700.
A great way to invest with little cash -- and get around the fractional-shares problem -- is through ShareBuilder. The commission is a low $4 per trade, and there's no investment or account minimum, or inactivity fee. Basically, ShareBuilder pools together several investors' small trades to make one large trade to save money.
Bypass the broker
Small investors can get around brokers entirely by buying stock directly from a company. About 1,400 companies offer such programs. Minimums, fees and requirements vary. Coca-Cola (KO), for example, only requires a minimum of one share and doesn't charge an enrollment fee. Disney (DIS) requires $1,000 to get started and charges a $10 setup fee, but you can get in for as little as $100 if you contribute that much automatically each month. Get a full list of companies with the details of their plans at Netstockdirect.com.
Another direct-investing option is the Low Cost Investment Plan of the National Association of Investors Corp. NAIC members can purchase shares in a select number of companies. Membership costs $50 a year and includes other NAIC publications and services.
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