| Tips and Tricks of the Pros |
You can use it to
buy shares in Intel or Johnson & Johnson or Harley Davidson (you
rebel), to name a few of more than a thousand options available. And what
about $100 or $1000? Your options are even greater.
We're not here
to tell you where to invest your money. We won't lay out a handful
of stocks on a "buy" list. But what we can tell you is how you can
invest your money -- the mechanics of investing small, large, and medium
amounts of cash.
How to invest $20
Let's start with $20.
We're going to assume that you've already paid off any high interest
debt and that you have some money stashed in a safe place (like a
savings or money market account) that you can get to quickly in case of an
emergency expense. Now you find yourself with a little extra dough and you
want to begin investing for your future.
Is it even worth it to
invest such a pittance?
Heck, yeah! One of the best ways to invest
small amounts of money cheaply is through Dividend Reinvestment Plans
(DRPs), also known as Drips. They and their cousins, Direct Stock Purchase
Plans (DSPs), allow you to bypass brokers (and their commissions) by
buying stock directly from the companies or their agents.
More than
1,000 major corporations offer these types of stock plans, many of them
with fees low enough (or free) to make it worthwhile to invest as little
as $20 or $30 at a time. Drips are ideal for those who are starting out
with small amounts to invest and want to make frequent purchases
(dollar-cost averaging). Once you're in the plan, you can set up an
automatic payment plan, and you don't even have to buy a full share each
time you make a contribution.
While you have to keep good records
for tax purposes, Drips may be one of the surest, steadiest ways to build
wealth over your lifetime. (For more details on Drips, see "What if I can
only invest small amounts of money every month?"
How to
invest a couple of hundred bucks
You've weeded out all the wooden
nickels from your spare change jar and have tallied up a few hundred
bucks. Instead of blowing it on snack food and Elvis
memorabilia, consider investing it in an index fund (the
only kind of mutual fund Fools like). An index fund that tracks the
S&P 500 is your entrée into an investment that has traditionally
returned 11% a year, and lately has been doing a good bit better than
that.
There are some index funds that require as little as $250
for you to call yourself an owner. This low minimum is usually restricted
to IRAs (Individual Retirement Accounts), After your initial investment, you can add as
much money as frequently as you like for no additional costs or
commissions. You purchase index funds directly from mutual fund companies,
so there are no commissions to pay to a middleman.
If you have a
few hundred dollars to start with, then this is a great, low-cost way to
establish an instant, widely diversified (500 companies!) portfolio.
How to invest $500
Once you're up to $500, your
investment options open up a bit more. You can still buy an index fund,
and will now have your pick of fund companies that have higher minimum
initial investment requirements. This freedom will enable you to shop
around for a fund with the lowest expense
ratio.
You should also put some serious consideration into
opening a discount brokerage account. You'll want to focus on the account
option that best serves your needs -- an account that has a minimum
initial deposit, or even none at all. That means you can open up an
account with whatever investing money you have available, and start
researching and perhaps purchasing individual companies. (Or, if you're
enamored of index investing, you can easily invest in Spiders a
stock-like investment that mimics the performance of the S&P
500.)
The key here is to keep your costs of investing (including
brokerage fees) to less than 2% of the transaction value. So if you're
planning to add to your position in stocks a few times a month, a Drip or
an index fund may still be the way to go.
How to invest
$1000+
What can you do with one grand? Obviously, with $1000 you
can open up a discount brokerage account, but look at the rewards if you
can scrape up an additional $1000 a year to add to your original
investment:
Say you've got 40 years to retirement. If you start
with $1000 and invest an additional $1000 each year, and your money earns
10% annually, then when you're ready to retire at age 65, you'll have
$532,111.07. That seems worth it to us. If you have earned income, you can
set up a Roth IRA, and you won't even pay any taxes on that $532K when you
withdraw it. Your mileage may vary, so use this handy
savings calculator to play with the inputs.
Again, even at this
level, the key is to keep fees from eating up your earnings. So make sure
that the costs of investing (including brokerage commissions, stamps to
mail in checks, and books
that help you learn to invest) are less than 2% of your account's
overall worth. Nowadays, with such low commissions being offered by
discount brokers, it's easy to manage your account for much less than 2%
of your assets annually.
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