Investing with $2000

For some reason $2000 is a very common amount for people wanting to start investing.  I receive many views from people typing some form of “How to invest with $2000,” or “Where to invest $2000” into search engines.  Perhaps it used to be the yearly limit on IRA contributions and still is the limit on educational IRA contributions.  Perhaps it is a nice round number people are able to scrape together.  Whatever the reason, I thought I would cover the topic in a bit more detail since there is so much interest.

A great book to learn about investing:  A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing

So, is $2000 enough to invest?  Sort of, and it depends where and why you are making the investment.  If you are investing in a standard, taxable account, $2000 is not enough to interest most mutual fund companies, so you’ll need to save up more before investing.  It is enough to buy a single stock with the understanding that you are taking a fairly high risk by doing so.  Based on no solid statistics, but simply based on my experience investing, I would estimate that your chance of losing the whole $2,000 because of a company in which you’re invested going bankrupt might be one in fifteen or so.  The chances of it just sitting there and doing nothing for a few years, or maybe even declining a bit and then just sitting there, might be one in two.

The right way to invest $2000 is to use it as a starting point to a lot more investing.  You may not do well with your initial $2000 investment, but if you keep adding another $2000 year-after-year, when you look back in 20 years you will most likely have a lot more than the $40,000 you will have invested.  With common stocks you will have some losers, but you will also have some winners that double and triple and quintuple in price.  If you are very lucky you’ll latch onto the next Home Depot or Microsoft, in which case your $2,000 might be a million or more.  (Of course any sensible person would have been selling as he went, so you probably wouldn’t actually have $1 million in one stock.)

With mutual funds as well you will have some bad years, but you will also have some great years.  Overall mutual funds have returned somewhere between 10-15% over long periods of time.  This happens in spurts with some strings of 30% gains in some years that make up for the years when they return 5% or even -10%.

So, here is how to invest $2000 for some of the common scenarios:

Investing $2000 in a taxable account:  If you are investing in mutual funds, which should be the case if you can’t stomach the 50% drops you might see with common stocks or simply don’t have the ability to pick individual stocks or the desire to learn to do so, you’ll need to save another $1000-$3000 or so to meet the minimums for most mutual funds.  You might be able to get in with less money if you allow automated paycheck deposits into the mutual fund as well.  Find a fund with low fees, no load to buy in, and no load to get out.  Vanguard is a good choice.

If you are willing to learn to invest in individual stocks, $2000 is enough to buy shares in one company in the $10-$18 range.  Stay away from penny stocks, and ignore what the posters on company message boards say.  Look for a stock that you think has good long-term prospects – one that you think will expand and grow for years to come – and expect to own it for a long time.  You can easily open a brokerage account with any of the online brokers to make the trade.

A final way you could invest $2000 is to buy shares in an Exchange Traded Fund (ETF) through a brokerage firm.  These are like mutual funds with super low costs that trade like stocks.  You’ll pay a commission when you buy the ETF, however, which is kind of like paying a load for a mutual fund.  If you buy the ETF and then hold it for a long time, however, the effect of this initial purchase fee will be minimal.

Investing $2000 in an Educational IRA:  Investing in an educational IRA is more tricky because you only have 18 years at the most before the money will be needed.  This means that using mutual funds or ETFs instead of single stocks makes sense since chances are far less that you will have a major loss.

It might be worth picking a few single stocks, however,  when the kids are young if you have substantial resources otherwise to pay for college.  This is because the earnings inside the educational IRA will grow tax-free if used for education and you have the greatest possibility of huge capital gains with single stocks.  If you have a stock or two that do very well, you might get 30 or 40% extra to go towards college than you would have had if you had earned the money through work or in a taxable account by saving on the taxes.  Understand, however, that you may need to make up the difference if the stocks you choose fail to grow.

Once the child is 13 or 14, the time window is no longer long enough to have single stocks, and converting some mutual funds to CDs or at least moving from growth into income would be wise since stocks may very well lose money over shorter periods of time.  At that point if you don’t have enough in the educational IRA it’s time to start making other plans to pay for college.

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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.


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