Every journey has a starting point.
Looking back, there was a time when I only had $1,000, and I pondered on venturing into the stock market.
While I was already accustomed to the workings of the stock market, mutual funds, and index funds, thanks to my 401(k) and Roth IRA, I hesitated to engage in taxable brokerage accounts to avoid the complexity of taxes. Perhaps this explains why many Americans hesitate to own stocks.
When I eventually decided to explore the stock market, my savings had grown to around $3,500, but I was uncertain about the next steps.
If I could give advice to my younger self at 20, here’s what I’d say…
This article isn’t professional financial advice; think of it more like a chat with a buddy. However, I did collaborate with Mike Piper from Oblivious Investor to ensure its accuracy. Mike is truly knowledgeable.
Don’t let financial terminologies daunt you; I’ll clarify them as we progress.
My Investment Strategy
Consistency is the key in life. Without understanding the underlying philosophy and strategy, it’s easy to be overwhelmed.
When starting with limited funds, focus on affordable and low-maintenance investments. Look for investments with minimal or no transaction costs, as even a $5 fee can eat into your small capital. At this point, it’s about setting your investment and not micromanaging it. Best to avoid intricate investments like real estate and tax liens for now.
Starting with just $1,000, diving into intricate investments isn’t the best choice. There’s time for that in the future.
Financial Priorities
Before investing:
- Set aside emergency funds.
- Clear any high-interest debts.
- Contribute to Roth IRA and/or 401(k), especially if there’s an employer match.
- Save for short-term goals, but opt for low-risk investments.
Points 1 and 2 focus on defense, ensuring you have a safety net. The third is proactive, maximizing benefits from tax-advantaged accounts. The fourth emphasizes that funds you might need soon shouldn’t be tied up in risky ventures.
Fundamental Principles
Here are some core tenets of my investment approach:
- Minimize costs: With only $1,000, transaction fees can eat into your profits. Thankfully, there are brokerages like Ally Invest offering free trades.
- Time is valuable: Instead of seeking investment opportunities, focus on increasing your investable income.
- Investing is a marathon, not a sprint: Resist the urge to take undue risks. Long-term consistency beats short-term highs.
So, what to do with your $1,000?
Options for New Investors
- Treasury Securities: Fixed income instruments backed by the U.S. Government.
- Certificates of Deposit (CD): Offered by banks, with FDIC backing.
- Public Markets: This broad category includes stocks, bonds, and more.
While the first two are secure, they offer modest returns in the current economic climate. Our primary discussion will revolve around the third.
Public Markets Explained
- Direct Stock Purchase Plans: Buy company stocks directly. For instance, you can buy Coca-Cola shares via Computershare Trust Company.
- Stock Brokerages: Starting with a brokerage like Vanguard or Fidelity allows you to trade ETFs and other securities commission-free. Companies like Ally Invest and Public offer free trades and a range of tools for investors.
- Robo-Advisors: Automated platforms like Wealthfront, M1 Finance, and Betterment manage investments based on algorithms.
DIY or Robo-advisors?
Choose to hand-pick funds or let a Robo-advisor manage your portfolio:
DIY with Funds: Big players like Vanguard or Fidelity are preferable. Vanguard has certain funds with a minimum investment of $1,000, and they offer both a Personal Advisor and Digital Advisor Service.
Robo-Advisors: Well-known options include Wealthfront, M1 Finance, and Betterment. They typically charge an advisory fee, but it’s often cheaper than traditional human advisors.
In conclusion, when I started out, Robo-advisors weren’t around, so I chose Vanguard. But the best choice always aligns with one’s personal financial situation and goals.
Have You Considered Different Investment Avenues?
While you might be thinking about various alternative investment channels, I’d advise caution, particularly for beginners. They can easily divert your attention. Having only a limited sum, like a few thousand dollars, won’t yield significant results if you delve into these alternatives.
For those with a bit more expertise, here’s a brief rundown of some investments I’ve tried and my take on them:
Angel Investing: It’s essentially a gamble. Chances are, you’ll lose your money. If you’re contemplating investing in a friend’s venture, be prepared to lose that amount without any strain on your friendship. An interesting perspective I once heard was from a friend who invested in another friend’s company to mitigate any feelings of jealousy. If the company prospered, he’d benefit from it, reducing any envy. If it failed, he’d only lose a minor amount compared to his friend’s significant loss.
Hard Money Loans: They carry high risk but can be rewarding. However, finding reliable borrowers can be a challenge, which affects scalability.
Real Estate: Requires hands-on management with a significant learning curve. It can be a wealth-building avenue, but not if you’re starting with a mere $1,000. Many resources suggest no-money-down techniques or house flipping, but unless you’re fully committed to this field, it’s best to explore other avenues. Crowdfunded real estate platforms might seem appealing but exercise caution initially.
Tax Liens: I’ve only looked into them without actual participation. The returns seem promising, but there’s the moral dilemma of possibly evicting someone.
At this stage, it’s wise to remain in the public markets, grow your assets, and then revisit your strategy.
Considering Single Stocks Investments?
Investing in individual stocks isn’t strictly good or bad. But be wary of following trends blindly or believing you can consistently outwit the entire market. A notable event was in January 2021, when Gamestop shares soared due to a short squeeze affecting a hedge fund.
On this note, I consulted Professor Tomas Jandik from the University of Arkansas, seeking his expertise on how to approach such sensational stock stories.
Professor Tomas Jandik
Courtesy of University of Arkansas, University Relations
Q. What insights can you share on the rapid rise of stocks like GameStop?
A: While the GameStop story has been dramatic, it’s essential not to overstate its implications. The story reveals the power of collective action. Some key takeaways include the influential role of social media in creating these concerted efforts, the dangers of choosing stocks solely based on momentum, and the inherent allure of Ponzi-like schemes for many.
Q. For someone finding index funds unexciting but wanting to invest more, any recommendations?
A: Consider splitting your investments into a “serious fund” and a “fun fund”. Prioritize index funds for the “serious fund”, while the “fun fund” can be for exploring other avenues. Over time, as you gain knowledge, both funds can be optimized.
Q. Advice for those holding stocks that have seen substantial short-term gains?
A: Keeping such stocks feels like a continuous gamble of “double or nothing”. It’s essential to set a threshold and sell once it’s reached.
Exploring Other Financial Strategies?
There’s no shortage of investment strategies if you delve into financial literature. But how effective are they? To get a clearer picture, I reached out to Professor Sina Ehsani from Northern Illinois University.
Professor Sina Ehsani, College of Business, NIU
Q. Given your research, can individual investors refine their approach beyond just a mix of low-cost index funds?
A: While low-cost ETFs remain a solid recommendation for the average investor, sophisticated ones can explore factor momentum. This strategy focuses on investing more in “winner” factors, which historically have outperformed.
Q. Any tools or resources for individuals to pinpoint promising areas?
A: Invesco’s “factor snapshot” is one useful resource. It ranks various factors based on previous performance, helping investors forecast potential winners.
Q. Does the rise of ETFs entail increased risk?
A: This strategy is more suited for active portfolios. Nonetheless, the standard advice of “buy and hold low-cost ETFs” remains invaluable for most retail investors.
In conclusion, while experts predominantly advocate for low-cost ETFs, understanding certain factors can potentially elevate returns. But the level of expertise required is profound. If you’re not up for such an intensive study, sticking to low-cost funds is the safer bet.
