If you’re looking to get started in stock investing, after you’ve taken care of getting your financial house in order, following the steps
we’ve outlined, the next step is to save up enough to make your first investment. And how much is enough?
If you’re buying into individual stocks, you’ll need between $2,000 and $3,000 to get started. And understand that it is possible to lose everything that you put into a single stock, or simply get a much lower return than the market, so you need to weigh those risks when choosing single stock investing. If you’re buying mutual funds, you’ll need between $3,000 and $5,000. In the world of investing, a few thousand dollars in a miniscule amount. Many times you won’t even get a specific, personal broker assigned to you if you have an account with less than about $100,000. Still, you need to start somewhere, and for many people getting started in investing, saving up a few thousand dollars is a daunting task, but it can be done.
Things to remember are:
1) The only way to save up is to spend less than you make.
Hope is not a plan. The only way to find money to invest is to set up a budget and direct some of your money into an investing fund. This may only be a hundred dollars per paycheck, but it needs to be something. If this means it takes you a year, so be it.
2) Automation can help.
It is often easier to set up automatic withdrawals to put money into an investment account than it is to remember to send in a check or transfer money each month. Because most of us are lazy, automating transfers will mean they will actually be made regularly, rather than us simply intending to put money away. Also, you’re less likely to spend the money on other things if it is taken out before you see it.
3) It will take time.
If you’re saving up a few hundred dollars per month, you’ll only be buying a new stock once or twice per year. This will seem to take forever, and it will seem pointless at times, but you’ll be surprised how fast things grow after you have been investing for several years. Remember that you make most of the money during the last few years when compounding. After one year you might have $3,000 invested,
then $6,000 after two, but after ten years you might have $50,000 or more – $30,000 you saved up and $20,000 you’ve made from your investments. After twenty years, you might have between $250,000 and $500,000. You’ll have a big investment portfolio you can draw from as needed while everyone else just has maybe $50,000 in equity in their home.
4) Regular investment is the key.
You’ll never time things just right. But if you keep investing regularly – putting money in as you have enough, you’ll be buying both during the highs and the dips, and getting more shares during the dips. Because the overall direction of the market is up, you’ll make more than you invest, given time. If you’re putting money into mutual funds, you can set up automatic investments of basically any amount with each paycheck.
5) Diversify as you go. When you’re just starting to invest, diversification – spreading your money out into different things – isn’t that important. If you put your first $3000 into one stock and that stock goes bankrupt, it’s disappointing but you can just save up and invest in a different stock. If you have your entire $50,000 that you’ve worked ten years to build in a single stock and that company goes bankrupt, you’ve taken a serious hit and it will be difficult to recover. This is why as your portfolio grows, you should be spreading the money out into different things.
If you start with stocks, buy maybe three different companies before you buy more shares of any given stock. When the positions start to get large enough to make you worry, get into a fourth or a fifth stock. If a single stock does well and grows too much, trim back the position and put the money into other stocks. When you get to maybe $30,000, put some of the money into a mutual fund for additional diversification. If you start investing in mutual funds, buy into a second fund in a totally different sector of the market after the balance in the first fund reaches $5,000 to $10,000. (Note it is better to save up enough to reach the minimum of the second fund rather than sell shares of the first if you’ve made a profit since then taxes will be due on any gain you make, which will reduce the amount you have available to invest.) Three to four different funds is all you will ever really need since they are very diversified by nature.
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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.