Want to know how to invest with little money in 2022? Learn how to invest money wisely when you have little money to start with.
How to invest with little money in 2022
Wondering how to invest wisely with little money?
The personal finance community is an odd bunch. We constantly complain that the average person doesn't have a lot of money on hand, yet most of our investing articles assume the reader has mountains of money to invest.
Short story: When I was first hired at a bank, they organized the second week of work as a credit training marathon. We'll never know why they hired me and did nothing for a week.
Anyway, the second week of work begins and I find myself in a room with other new hires learning the basics of credit for 9 hours a day. The course had a detailed and promising curriculum, and everyone was excited to learn.
And the training was a total disaster.
The instructors of this "introductory" course had at least 30 years of banking experience. They were experts in their field, and career bankers had simply forgotten what it was like to start a career.
Concepts that were second nature to them were completely alien to us. They constantly talked over our heads, and neither teachers nor students could speak to each other in the same language if our careers depended on it.
Today, I notice a similar phenomenon on the web. Millionaire pensioners are trying to entice people with only a few thousand euros or less to start investing.
As a fresh college grad who vividly remembers what it's like to scrounge up part-time income just to have something to invest, hopefully, I'll get a little better at showing you how investing with little money than 60-year-old bankers explaining credit default swaps to new hires.
Special considerations when investing small amounts of money
There are a few investment rules that become even more important if you want to invest a small amount of money wisely:
1. Don't be nervous
Pulling the trigger on your first investment is probably the most nerve-wracking experience of your entire investing career.
What will happen if you make a mistake? What if you lose everything?
That's why you must keep track of everything. Investing in CRM systems is also considered an investment because that's where you can keep up to date with your database, so you won't have everything mixed up on your table.
I have been there. Every investor has been there, from the novice indexer to Warren Buffett.
Here's the good news: there's no better time to start your investing journey than now. Unless you want to pay literally hundreds of thousands of dollars to a financial advisor during your investing career, you're going to want to learn these things someday.
And I'll let you know that there are a lot of instances where people think of something extraordinary that some wouldn't usually do just to earn more.
What better time to learn than when you're just starting out? After all, it's better to make a mistake when dealing with a $3,000 portfolio than a $300,000 portfolio.
2. Trying to beat the market is even dumber than usual
In general, trying to outperform the market by trading individual stocks is a losing bet. Most professionals fail to do this, and when you're dealing with small amounts of money, it's even less wise to try.
The reason is simple: mathematics. And the percentages. Ok, that's a terrible explanation. Let me explain to you:
Imagine a hedge fund manager managing a client's $10 million portfolios. If it has a great year and outperforms an index fund by 3%, the portfolio gains an additional €300,000. It's a tempting sum.
If you start your investing career with a portfolio of €3,000, beating the index fund by 3% in one year gives you... €90. It's not really worth the time and effort.
Of course, there's the giant elephant in the room – tons of research indicates almost no one can consistently beat the market. Going against this research, especially when the potential payoff is so minuscule, is truly a fool's game.
3. Trading fees can eat you alive
Once again, that old bastard of percentages is there to discourage the small investor from getting carried away with his trading strategy.
The typical brokerage fee for buying a stock is around €8, then an additional €8 when selling. €16 is not a lot when you have €100,000 of shares in hand. But when it comes to €1,000, these costs are very significant!
If you pay €16 in fees for a €1,000 purchase, your stock pick must increase by 1.6% for you to break even. Talk about pressure!
How to invest with little money: my own experience of investing with little money
If I sounded confident while writing those last three points, then I have a confession to make:
I know all of these points because I have experienced them all, firsthand.
When I started investing in the stock market, I didn't even have €1,000. I vividly remember my first stock purchase. I remember nervously staring at the “Place Order” screen for hours before working up the courage to click the button.
I also remember thinking that I would increase my returns by picking individual stocks to outsmart the market. When I made a hit, I walked away with €50 more. When was I wrong? Hundreds of euros were lost.
At some point, I calculated how much I was paying in transaction fees. My returns lagged index funds by a lot! I was shooting myself in the foot, and spending a lot of time and effort doing it!
The best way to invest small amounts of money wisely
I finally understood, changed my investment strategy, and discovered how to invest wisely with little money. The most surprising?
The best way to invest small amounts of money wisely is almost identical to the best investment strategy for large amounts of money!
Find a low-fee, broadly diversified index fund.
Building a broadly diversified portfolio of many different stocks requires far too much capital for someone with a small investment budget.
Instead, take advantage of what Warren Buffett considers the greatest advancement for the average investor: the index fund!
With the purchase of a single stock, you can instantly diversify into hundreds, if not thousands, of the best companies in the world.
Here is an excellent choice for the novice investor:
Vanguard 500 funds:
- Serial number: VFINX
- Minimum investment: €3,000
- Opinion of Markethingway: The 500 largest companies in the United States. When you hear the talking heads on TV talk about the "marketplace," it's these 500 companies they're usually referring to.
And keep investing!
Although it may not seem possible at first, I promise that by constantly adding to your small investment, you will get results.
By adapting your investment strategy to the size of your portfolio and avoiding some of your mistakes, this sensible approach will make your wealth explode.