I would like to put aside some money each week to invest. What is the best way to invest money in small amounts?
Unfortunately buying stocks directly is best done with relatively large amounts – on the order of $2000-$5000 at a time. This is because brokerage fees generally have a minimum and those costs will severely hurt returns if investing a few hundred dollars at a time. If one buys lower priced stocks – those trading in the $5-$15 range one can get away with investments of $500-$1500 at a time, but this limits the companies available. Buying stocks at less than $5 per share is generally not recommended since most stocks in that price range have encountered some serious problems and are more suitable for value investing, which is not the strategy I recommend.
There are really two options for investing smaller amounts in stocks regularly (this assumes one does not want to save in a money market fund until $2000-$5000 is saved, buy some shares, then repeat, but would rather be actually buying stocks with the small installments) . That is either to buy mutual funds or use a dividend reinvestment plan.
Many mutual funds, such as those offered by Vanguard, allow relatively small initial investments – on the order of $3000-$5000, and then allow you to send in whatever amount you wish after that. Index funds are recommended due to their low fees and because very few managed funds beat out index funds over time due to their higher fees.
The strategy using funds would be to save up and buy into a mutual fund (again, $3000-$5000), then start sending in the regular smaller deposits after that. Some companies even allow direct deposit so you don’t even need to worry about sending a check. Once the account balance builds up, say to the $6000-$10,000 range, you can then sell some of the original mutual fund and start investing in other mutual funds as well, to increase your diversification, or start buying individual stocks with some of the money.
It is the belief of this blog that if you buy the right type of stocks – stocks that are solid, best-or-breed, steady growth companies – and are willing to hold them for a long period of time to reduce timing risk, you can beat out the mutual funds and market in general. This results in greater fluctuations in account value, however, than holding mutual funds. Those with weak stomachs will therefore find holding some portion or the entire portfolio in mutual funds a better choice.
The other strategy is to use Dividend Reinvestment Plans. These allow investors after the original investment through a broker to buy shares directly from the companies as well as buy additional shares with dividends. Most companies that offer these plans are large, well-established companies. These companies tend to be stable with steady income streams. Unfortunately, they also tend to only deliver returns at about the rate of the market or a little slower since they have already largely reached their full market size.
In this strategy, a stock would be selected and purchased, then regular payments sent. When the position was sufficiently large, say $5000, one would sell half of the shares and buy a second company with the money, continuing this process until about 5 companies were held.
At some point the account would grow large enough to shift from a pure growth strategy, which buying small numbers of individual stocks is, to one designed for growth and some asset protection. This is done through diversification – spreading the investments out over several stocks. At that point some of the money would be shifted into mutual funds or Exchange Traded Funds (ETFs) since that is the easiest way to diversify. Again, index funds of broad market ETFs are recommended. Remember never to have more money in one stock than you are willing and able to lose. Even strong, stable companies like GE can see their share price drop by 90% or more in short periods of time.
Regular investing is the key to growing wealthy. If one can put things on autopilot and make putting money away part of each months activities, one can do very well.