Can You Invest a Small Sum of Money?


One common question asked is how much is needed to invest.  The answers to this question will vary depending on whom you ask and what kind of investing you’re looking to do.

The main determining factor is what the transaction costs and other fees.  If it costs $60 per transaction and you’re buying or selling $6000 worth of stock, the transaction costs will not greatly affect your return.  If you are only investing $500, however, and your transaction costs are $20 per trade, it will be difficult to make much headway.

In general it requires at least a couple of thousand dollars in savings before the transaction costs start to become reasonable.  Even in that case, if you are investing in individual stocks, you would only want to buy one stock at a time.  Spreading that $2000-$3000 over two or more stocks would just cost too much in brokerage fees.  Investing in a single stock, however, would involve a significant degree of risk since one wrong move by an executive or even just a down quarter could result in the loss of a substantial amount of your investment.

Another option would be to put money into mutual funds since this would provide greater diversification.  Most mutual funds also have  minimum amounts that can be invested.  Vanguard funds typically have $3000-$5000 minimums.  Other fund companies may have minimums of $10,000, $25,000, or more.  In some cases a smaller minimum can be used to start if regular automated direct deposit of funds from a bank account is started.

Either way, the secret to doing well at investing is to invest regularly.  You should be spending less than you make and putting away money each month.  Each time that you gather up a few thousand dollars (after you have paid off your credit cards and cars and a good emergency fund), buy additional shares of stock or put more into you mutual funds.  Eventually, the proceeds from the stock investments will be enough to provide an income to you and allow you to continue to accumulate shares.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

Getting Started in Investing


Getting started in investing is really a bit like getting started in fishing.  Sure, you can go and get elaborate lessons, or you can hire someone else to just bring you fish (for a price).  Sometimes though you just go and cast your line in the water and see if something bites.  Over time you learn the best bait and the best color of lures.  Maybe you even get a fancy bass boat with a sophisticated fish finder and learn where the fish go at different times in the year.  The point is that you need to start somewhere, and until you drown a few worms, there is only so much you can pick up from books and websites.

Of course, going out and buying an $80,000 Bass Tracker before you even know you like fishing would be unwise.  Likewise, dropping $80,000 in stocks with no clue of what you are doing would be unwise.  Here are some steps to take and things to consider before you make your first cast:

1.  Get in slowly.   It is important for both your psychology and your wallet to wade into the markets slowly.  If you start with a large sum to invest and put everything you have in at once right when the market decides that’s the time to take a drop, you are likely to get scared, sell out, and then swear off investing forever.  If you buy in a little bit, wait a few months, then buy a bit more, then if there is a drop in the price of the stocks you selected it will be like you’re getting more shares on sale.  Note also that there have been a few times (like 1929 and 1999) where if you invested all at one time it would take more than a decade to get back to even.  Even in those times, however, if you had invested a small percentage regularly over several years you would have come out well ahead.

If you’re starting with a small cash position (say a couple of thousand dollars) but then saving regularly to invest more, it would be alright to invest all you have saved for investing at once since you will have more money to invest in a few months once you have saved up again.

2.  Ignore the hype.  If you hear about a hot stock on CNBC or Money magazine, chances are the stock has already run up and is ready to tumble.  Likewise, there are always people out there selling doom and gloom.  If they do it long enough, they will eventually be right, but you will have missed a lot of return sitting on the sidelines.  Do your own research and remember you are looking at the long-term view.  If things start to look dicey, start saving up cash so that you can buy in cheap if there is a fall.

3.  Read, read, read.  Millionaires read at least one non-fiction book a month.  Read books on investing strategies and the fundamentals of stock analysis.  Read about business and negotiations.  Read about history.  Get a subscription to the Wall Street Journal and read the articles on investing.  Get Money magazine and Forbes.  Keep point number 2, “Ignore the hype,” above in mind as you do this reading – there is a lot of bad advice out there.  Take in all perspectives but then see what actually works.

4.  Have the right mindset.  Invest in businesses, not stocks.  People trading stocks will have a lot of good stories to tell but the fact is almost none of them will beat the market over long periods of time.  Most will do far worse.  The reason is that the market prices in all news that is out there almost immediately.  The fluctuations in price that occur therefore are almost random.  Trading stocks is like flipping a coin and betting on the outcome.  You may get a short-term streak, but you will lose out over time.

Instead, find businesses that look like they can grow over the long-term and buy into them.  At times their stocks will rise dramatically and become overpriced.  At times their stocks will fall along with the rest of the market and become very cheap.  Perhaps sell a few shares if the price is really high, or buy more shares if the price is really cheap, but in general ignore these aberrations and hold the stock so long as the company is doing well.  Reward will always come eventually.

5.  This is a marathon, not a sprint.  Sprinters wear out and die.  Buy for the long-term.  It is difficult to find stocks that will do well in the next few month or the next year.  It is far easier to find companies that will do well over the next decade.  Because stocks will be at a lower price today than they will be in the future if they continue to increase earnings (because there is a risk that they will not make those earnings), it is possible to actually find the stocks likely to go up if you take the long-term approach.  The same cannot be said for the short-term.  Find stocks that look good in the long-term and plan to buy in and stay in.

Also, don’t sweat the short-term fluctuations.  Even good stocks decline when the whole market declines.  Keep focused on the finish line 26 miles away, not on the first 100 yards.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Pierre Amerlynck , Downloaded from stock.xchng

You Never Know What Will Affect Your Returns


I have been buying shares of Stryker Corporation for a while.  With the BabyBoomers entering their sixties and seventies, it made sense that a maker of artificial hips and other such medical devices would do well.  Or so I thought.

The stock has not really done well, despite some fits and starts.  See the 2-year chart here.

Then today, on the front page of my Wall Street Journal was a story about the CEO of the company whom apparently was forced out of the position due to a relationship he was having with a former employee of the company while he was going through a divorce from his wife.  In this case the CEO had asked permission from the board of directors to date the employee, who agreed he could if she quit her job, which she did.  Apparently this still didn’t sit well with some of the investors, however, and eventually he was asked to resign.

I don’t know in this case if the relationship or all of the issues it caused contributed to the stagnant behavior of the shares.  Perhaps it had no affect on his decisions or performance as CEO.  Maybe it did.  Maybe investors who heard fo the relationship going on sold off because they were worried it would affect his performance.

My point here is that even in good companies, things can happen to cause the shares to decline or simply go nowhere.  There could be a lawsuit – baseless or with merit.  There could be factors that affect the performance of critical officers.  There could be fraud or theft.

You should therefore never keep more money in a single company than you are willing to lose.  This is especially true if you also work for the company, since you are then setting yourself up for both losing your investment and your job.  If you receive a large amount of stock – more than you would go out and buy today if you had the cash, sell some shares.  If a stock goes way up and becomes a dominant portion of your portfolio, sell some shares off and buy into other companies.

Even the best companies sometimes hit an obstacle.  You could see your shares disappear, or simply fall and be down for a decade or more.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Kurhan, Downloaded from stock.xchng