Usually, investment advice is given to people who have thousands or at least $1,000 to invest, in addition to the usual three to six months of salary saved in a savings account.
Most of us know how important it is to invest more in traditional taxable investment accounts to add to our retirement savings. Putting the most you can into your IRA and putting 6 percent of your pay into your employer's 401(k) may not be enough, but not everyone has the thousands of dollars that most investment advice suggests. Here is a plan that was made for very small investors. Only $100 a month for a year is needed.
Should You Spend Money?
First, it's important to figure out what's most important to you financially. If you have credit card debt with high interest rates, don't invest until you're out of debt. It is possible to make more money from investing than you lose in interest, but it is very unlikely. The best way to spend your money is to pay down your credit card balances.
Also, if you don't have any cash saved, you might want to put this plan on hold until you have at least three months' salary saved.
Lastly, you probably shouldn't invest directly if you'd be devastated if you lost all the money you put in. No matter what you invest in, it is possible to lose all or part of the money you put in. If you are careful, this is not likely to happen.
With just $100, you can start to invest.
- Buy your first stock or bond.
- Add money to your account. Here is where you give the broker your first $100 by check, wire transfer, or ACH transfer. I recommend ACH transfer, which is like an electronic check, because a check takes a few weeks to process and a wire transfer is too expensive for such a small amount.
- Sign up for an online broker account with a low-cost broker. It's important that you don't pay more than $5 per trade, because that's money that will come out of your investment. Also, make sure the broker you choose doesn't have a minimum account balance. If they do, fees will eat up your entire balance. Visit our broker comparison chart to learn more about discount stock brokers.
What you invest in is obviously very important, but if you're only investing $100, professional investment advice is too expensive. But studies have shown that portfolios with a lot of different types of investments give the best returns.
Now, $100 won't even buy you one share of Google (GOOG) or Toyota, so it's hard to have a portfolio with a lot of different stocks (TM). But Exchange Traded Funds (ETFs) make it easy to invest a small amount of money in a wide range of securities because they are shares in a larger pool of securities. The Vanguard Total Stock Market VIPER (VTI) tracks more than 6,000 U.S. stocks. It's like putting your first $100 into the whole U.S. stock market. The iShares MSCI-EAFE (EFA) buys European, Australian, and Asian stocks. The iShares Lehman Aggregate Bond (AGG) follows the Lehman Brothers Aggregate Bond Index. It's like putting $100 into the whole bond market.
If you put $100 into each of these funds over the course of three months, you will have a well-balanced portfolio that should be able to handle most changes in the market. Any losses in one part of the stock market should be made up for by profits in other parts. If you add to it every month and never invest less than $100 at a time, the value of your account should grow along with the stock market.
There are a lot of ETFs to choose from, and they are becoming more diverse. For example, there are now funds that invest in junk bonds and commodities. I would avoid them until I had at least $1,000 in traditional stock and bond ETFs. The majority of your portfolio should be made up of traditional investments, not alternative ones.
As you watch your investment grow (then slow down, then grow again), you should learn more about asset allocation and portfolio diversification, which are the keys to successful investing. When stock prices drop, you will be able to handle volatile markets better if you have a wide range of investments.
Lastly, when the total value of your investments reaches $10,000, you should think about getting professional investment advice and moving your holdings to traditional mutual funds, which are easier to manage but usually have higher investment minimums.
