Invest with Little Cash: Contrary to popular belief, the stock market is not just for rich people.
Investing is one of the best ways for anyone to create wealth and become financially independent.
A strategy of investing small amounts continuously can eventually result in what is referred to as the snowball effect.
In which small amounts gain in size and momentum and ultimately lead to exponential growth.
To accomplish this feat, you must implement a proper strategy and stay patient, disciplined, and diligent.
These instructions will help you get started in making small but smart investments.
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Invest with Little Cash
1. Ensure investing is right for you.
Investing in the stock market involves risk, and this includes the risk of permanently losing money.
Before investing, always ensure you have your basic financial needs taken care of in the event of a job loss or catastrophic event.
- Make sure you have 3 to 6 months of your income readily available in a savings account. This ensures that if you quickly need money, you will not need to rely on selling your stocks. Even relatively “safe” stocks can fluctuate dramatically over time, and there is always a probability your stock could be below what you bought it for when you need cash.
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2. Ensure your insurance needs are met.
Before allocating a portion of your monthly income to investing, make sure you own proper insurance on your assets, as well as on your health.
Remember to never depend on investment money to cover any catastrophic event, as investments do fluctuate over time.
For example, if your savings were invested in the stock market in 2008.
And you also needed to spend 6 months off work due to an illness.
You would have been forced to sell your stocks at a potential 50% loss due to the market crash at the time.
By having proper savings and insurance, your basic needs are always covered regardless of stock market volatility.
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Invest with Little Cash
3. Choose the appropriate type of account.
Depending on your investment needs, there are several different types of accounts you may want to consider opening.
Each of these accounts represents a vehicle in which to hold your investments.
- A taxable account refers to an account in which all investment income earned within the account is taxed in the year it was received.
- Therefore, if you received any interest or dividend payments, or if you sell the stock for a profit, you will need to pay the appropriate taxes.
- As well, money is available without penalty in these accounts, as opposed to investments in tax deferred accounts.
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4. Invest with Little Cash
A traditional Individual Retirement Account (IRA) allows for tax-deductible contributions but limits how much you can contribute.
An IRA doesn’t allow you to withdraw funds until you reach retirement age (unless you’re willing to pay a penalty). You would be required to start withdrawing funds by age 70.
Those withdrawals will be taxed. The benefit to the IRA is that all investments in the account can grow and compound tax free.
If, for example, you have $1000 invested in a stock, and receive a 5% ($50 per year) in dividends, that $50 can be reinvested in full, rather than less due to taxes.
This means the next year, you will earn 5% on $1050.
The trade-off is less access to money due to the penalty for early withdrawal.
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5. Implement dollar cost averaging.
While this may sound complex, dollar cost averaging simply refers to the fact that — by investing the same amount each month — your average purchase price will reflect the average share price over time.
Dollar cost averaging reduces risk due to the fact that by investing small sums on regular intervals.
You reduce your odds of accidentally investing before a large downturn.
It is a main reason why you should set up a regular schedule of monthly investing.
In addition, it can also work to reduce costs, since when shares drop.
Your same monthly investment will purchase more of the lower cost shares.
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Invest with Little Cash
6.Explore compounding.
Compounding is an essential concept in investing, and refers to a stock (or any asset) generating earnings based on its reinvested earnings.
This is best explained through an example. Assume you invest $1000 in a stock in one year, and that stock pays a dividend of 5% each year. At the end of year one, you will have $1050.
In year two, the stock will pay the same 5%, but now the 5% will be based on the $1050 you have.
As a result, you will receive $52.50 in dividends, as opposed to $50 in the first year.
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7. Avoid concentration in a few stocks.
The concept of not having all your eggs in one basket is key in investing.
To start, your focus should be on getting broad diversification.
Or having your money spread out over many different stocks.
Just buying a single stock exposes you to to the risk of that stock losing significant value.
If you buy many stocks over many different industries, this risk can be reduced.
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Invest with Little Cash
8. Find a broker or mutual fund company that meets your needs.
Utilize a brokerage or mutual fund firm that will make investments on your behalf.
You will want to focus on both cost and value of the services the broker will provide you.
- For example, there are types of accounts that allow you to deposit money and make purchases with very low commissions. This may be perfect for someone who already knows how they want to invest their money.
- If you need professional advice regarding investments, you may need to settle for a place with higher commissions in return for a higher level of customer service.
- Given the large number of discount brokerage firms available, you should be able to find a place that charges low commissions while meeting your customer-service needs.
- Each brokerage house has different pricing plans. Pay close attention to the details regarding the products you plan to use most often.
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9. Open an account.
You fill out a form containing personal information that will be used in placing your orders and paying your taxes.
In addition, you will transfer the money into the account you will use to make your first investments.
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Invest with Little Cash
10. Be patient.
The number-one obstacle that prevents investors from seeing the huge effects of compounding mentioned earlier is lack of patience.
Indeed, it is difficult to watch a small balance grow slowly and, in some instances, lose money in the short term.
- Try to remind yourself that you are playing a long game. The lack of immediate, large profits should not be taken as a sign of failure. For example, if you a purchase a stock, you can expect to see it fluctuate between profit and loss. Often, a stock will fall before it rises. Remember that you are buying a piece of a concrete business, and in the same way you would not be discouraged if the value of a gas station you owned declined over the course of a week or a month, you should not be discouraged if the value of your stock fluctuates. Focus on the companies earnings over time to gauge its success or failure, and the stock will follow.
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11. Keep up the pace.
Concentrate on the pace of your contributions.
Stick to the amount and frequency you decided upon earlier, and let your investment build up slowly.
- You should relish low prices! Dollar-cost-averaging into the market is a tried and true strategy for generating wealth over the long run.
- Furthermore, the less expensive the stock prices are today, the more upside you can expect tomorrow.
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12. Stay informed and look ahead.
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13. Stay the course.
The second biggest obstacle to achieving compounding is the temptation to change your strategy by chasing fast returns from investments with recent big gains or selling investments with recent losses.
That’s actually the opposite of what most really successful investors do.
- In other words, don’t chase returns. Investments that are experiencing very high returns can just as quickly turn around and go down. “Chasing returns” can often be a disaster. Stick to your original strategy, assuming it was well thought out to begin with.
- Stay put and don’t repeatedly enter and exit the market. History shows that being out of the market on the four or five biggest up-days in each calendar year can be the difference between making and losing money. You won’t recognize those days until they’ve already passed.
- Avoid timing the market. For example, you may be tempted to sell when you feel the market may decline, or avoid investing because you feel the economy is in a recession. Research has proven the most effective approach is to simply invest at a steady pace and use the dollar cost averaging strategy discussed above.
- Studies have found that people who simply dollar cost average and stay invested do far better then people who try to time the market, invest a lump sum every year on new years, or who avoid stocks. The reason for this is that it takes a decade or so to learn the many pitfalls in investing in stocks, like the emotion that goes with a bull market, exaggerated information, sales groups that are paid to sell and tend to bend the information to look to rosy and just plain fraud. Many brokers will not tell you that 99.9999% of all companies go bankrupt over time, so mutual funds and dollar cost averaging avoids all the bad companies that are removed without you have to do any homework or lose any money.
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15. Invest with Little Cash
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Ask for help in the beginning. Seek the counsel of a professional or a financially experienced friend or relative. Don’t be too proud to admit you don’t know everything already. Lots of people would love to help you avoid early mistakes.
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Keep track of your investments for tax and budget purposes. Having clear, easily accessible records will make things much easier for you later on.
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Avoid the temptation of high-risk, fast-return investments, especially in the early stages of your investing activities when you could lose everything in one bad move.
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If you employer has a 401k program where they match what you invest, it would be crazy not to take advantage of it. It is an immediate 100% return on your money. Banks would never give you $100 for every $100 invested.
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It is important to know whether or not we are in an inflationary decade. Inflationary decades favor hard assets like Real Estate and Gold but Dis-inflationary decades favor Stocks. Inflationary decades are marked by prices (like gasoline) rising, a weak dollar and gold rising. During Inflationary decades, Real Estate outperforms the stock market. Dis-inflationary decades are marked by lowering of interest rates, a strong dollar and a strong Stock Market. During dis-inflationary decades, the stock market outperforms Real Estate and Gold.