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Are you thinking about starting to invest and want to find out more about where and how you can start investing even if you have very little money?
First of all, I want to pat your back and congratulate you because the fact that you want to start investing means that you are SMARTER than most people who have never thought about investing their money.
If you are reading this right now, I know that you understand the importance and benefits of investing:
- Investing helps you beat inflation and maintain your purchasing power
- Investing helps you grow your wealth
- Investing helps you prepare for your retirement
- Investing helps you save a lot on taxes
- Investing helps you achieve your financial independence
The WORST thing anyone can do to their hard-earned money is to let it sit in the bank and lose value gradually because the bank interest rate cannot even help you beat the inflation.
The very LEAST you should do is to put your hard-earned money in a high yield savings account.
One of the best high yield bank accounts that I recommend is CIT Bank which offers the following benefits:
- Earn over 11x the national average
- Quick and easy access to funds
- No monthly service fees
- 24/7 secure & award-winning banking
- FDIC insured4
- Deposit checks remotely and make transfers with the CIT Bank mobile app
So, I highly recommend that you put your liquid cash and emergency funds in high yield savings account with no maintenance fees and you can also withdraw any time you want.
Visit CIT Bank Website Now.
The Truth About Investing
Before you start investing, this is what you should know about investing.
Truth #1: There is always risk when it comes to investing
Whether you invest your money in the stock market or bonds or gold, there is also risk involved.
That means there is a REAL possibility of losing money.
For example, the stock market can go up or down.
And no one can predict the stock market.
So, when you invest in stocks, either one of the three things will happen:
- The stock price goes up and you make money
- The stock price goes down and you lose money
- The stock price stays the same and you might make money if there are stock dividends
The same goes for other investment asset classes such as bonds, real estate and commodities.
If you don’t want to lose money and don’t want to take risks, then investing is probably not for you.
Instead, you should stop reading and put all your money in risk-free time deposit with your bank and work harder to earn more money to keep up with inflation.
Truth #2: Follow Warren Buffet’s NO.1 investment rule – “Never lose money.”
When it comes to investing, too many people only look at the upside and ignore the downside risk.
That’s NOT the mindset you want to adopt as a beginner investor.
Just imagine what you would do if you are asked to bet your entire savings on a fair coin toss.
It’s double or nothing.
Would you do it?
Of course, you wouldn’t.
Then, would you be willing to risk 30% of your savings to make an equivalent gain?
Because losing a substantial amount of money could affect your standard of living.
On the other hand, a comparable gain would not improve your life by as much.
In other words, you might feel the risk is not justified by the return.
So, why would you do it differently when it comes to investing?
Let me introduce you to this concept called “Risk of Ruin”.
Below is the table of the risk of ruin.
You can see that the more you lose, the harder it gets to recover your loss.
In fact, when you lose 50% of your capital, you will have to make a 100% gain to make back your lost capital.
Warren Buffett famously said,
“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No.1”
So, don’t get lost in the pursuit of high return in the short term when you should focus on consistent returns for the long term.
Truth #3: Don’t confuse investing with trading
Investing is NOT trading.
It’s very important that you understand the difference.
Generally, investing is about looking for a quality investment asset that has the potential to appreciate in value over time.
And when you invest, you invest for the long term.
But, trading is mostly about looking at the price charts and trying to spot an opportunity to make money from the price movement without looking at the fundamentals of the investment asset.
All traders care about is short-term market volatility.
In other words, they just want to buy low and sell high and profit from price fluctuation in the short term.
So, they could go in and out of the market many times in just one single day.
Compared to investing, the frequency of transactions is much much higher.
As a trader, you will need to constantly stare at your computer and monitor the market movement to find trading opportunities.
So, there is a lot of time involved.
If you are an investor, you just need to monitor and review your investments a few times a year.
Lastly, as an investor, you don’t cut losses as soon as the market goes against you.
You will only sell your investments when one of the following conditions is met:
- Your investment has reached your desired returns
- Investment becomes overvalued
- Reason for investing is no longer valid
- There are much better opportunities
- Portfolio needs re-balancing
However, traders are different.
They need to cut their losses quickly when their judgment of the market direction is wrong.
So, before they enter a trade, they should already know their cut-off point and take-profit point.
When Is The Best Time To Start Investing
Regardless of what age you are right now, the best time to start investing is today.
When I was working as an analyst in an investment management company, my boss taught me a valuable lesson.
And I am going to share with you today.
The sooner you start investing, the more the “power of compounding” can work in your favor.
Now, let’s look at how powerful compounding is when it comes to growing your money.
Let’s say you start investing at the age of 21 and you invest $2,000 every year for 20 years.
Assuming your investment grows at 8% annually and you reinvest any profits (i.e. dividends or interest income from your investment), you will have turned your $24,000 into $471,358 by the age of 67.
That’s about 2,000% return on your initial investment!!!
Now, let’s look at another scenario.
Let’s say you ONLY start investing at age 47 and invest $2,000 every year for 20 years.
Assuming your investment grows at 8% annually and you reinvest any profits (i.e. dividends or interest income from your investment), you will have turned your $24,000 into $59,295 by the age of 67.
If you had started investing 26 years earlier, you would have made $400,000 more.
So, you can see what compounding can do for you and your investment and why starting investing early is so important.
But, that’s NOT to say that if you are already in your 30s, 40s, or 50s, there is no point to start investing.
All the more, you should start investing as soon as possible.
How Much Do You Need To Start Investing?
Now, how much do you actually need to start investing?
A lot of people have the misconception that you need a lot of money to get started.
But, that’s simply NOT true.
There are a lot of investing apps that allow you to start with as little as $5.
But, then you might say,” Gladice, investing $5 a month is not going to make me rich.”
In fact, $2745.72 is exactly how much you will get if you invest $5 a month for 20 years, assuming an 8% compound interest.
That’s not going to help you much if you are investing for retirement or want to grow your wealth.
But, that doesn’t mean there is no point to start investing with 100 dollars a month.
So, let’s look at how much you will have if you invest $100 per month for 20 years.
And here’s how much you will have if you invest $200 per month for 20 years.
Now, let’s go back to our previous example.
If you start investing at 21 and you invest $2,000 every year (i.e. $170 every month) for 20 years, you will have turned your $24,000 into $471,358 by the age of 67.
How To Start Investing If You Are Beginner
If you are new to investing and have no related knowledge, here’s how and where you should start.
You see, there are four major different types of investments:
- Investment Funds (Mutual Funds, ETFs, etc)
- Alternative Investments (Real Estate, Gold, Peer-to-Peer Lending, Cryptocurrency, Private Equity, etc)
Here is what you should know about each one of them.
When you invest in stocks, you are basically buying part of a company. If the company makes money and continues to do so for years to come, then you are going to make a lot of money from your stocks.
But you don’t want to invest in any kind of stocks.
If you see penny stocks, run for your life because it’s only going to make you lose all your money.
When you invest in bonds, you are basically lending money to companies or governments.
And the interest they are going to pay is definitely higher than whatever your banks will pay you.
But the higher the interest, the riskier the bond.
So, you should choose your bonds wisely and NEVER lend money to companies or governments that might not be able to pay you back.
Now, are bonds better? Or are stocks better?
Well, bonds are safer than stocks, but stocks historically generate better returns.
What about investment funds?
Investment funds are funds that pool money from many investors and invests the money in things such as stocks and bonds.
The good thing about investing in investment funds is that you don’t have to pick what stocks or bonds to invest in.
The ONLY investment fund that you should put your money in is exchange-traded-funds.
First, what is an exchange-traded-fund?
- An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
- ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
When you invest in a stock ETF, you are not buying just one stock but many different stocks.
That’s good because if you invest in just one single stock, you could lose all your money if that company goes bankrupt.
But that will NEVER happen with a stock ETF because it’s extremely unlikely that a group of companies can go bankrupt at the same time.
So, there are different types of stock ETFs.
There are stock ETFs that only invests in a specific industry like healthcare or financials.
However, I don’t recommend it if you are just starting to invest.
Here is what I DO recommend:
- Index fund ( e.g. S&P 500 index fund)
- Investment-grade bond ETFs
An S&P 500 index fund invests in the 500 stocks that comprise the S&P 500 index, in market-cap-weighted proportions.
So, when you invest in S&P 500 index fund, you are investing in all the 500 stocks.
That is very diversified.
Diversification is good because your risk will be reduced.
Also, the index fund represents the health of the country’s economy.
A country’s economy can go through periods of growth and recession, but it will always grow over time in the long term.
What that means is that index fund will always go up in the long term.
What about mutual funds? Should you invest in mutual funds too?
The short answer is STAY AWAY FROM mutual funds.
Mutual funds are generally professionally managed by fund managers.
And research has shown that more than 90% of fund managers CANNOT beat the stock market index return.
In other words, you are better off putting your money in a passively managed index ETFs which closely tracks the stock market index return.
What’s more, is that mutual funds charge higher fees (typically 1 to 1.5%)
Compared to mutual funds, ETFs have much cheaper fees which are less than 0.5%.
That’s only about a 1% difference in fees, BUT this small 1% can significantly reduce your returns over the years.
Assuming that you invest $100,000 with an investment fund for 20 years with a 4% annual return, let’s see how much a small percentage increase in annual fees can reduce your portfolio value.
0.5% annual fees reduce your portfolio value by $10,000 compared to a portfolio with a 0.25% annual fee.
Let’s put this in perspective.
$10,000 is 10% of your total investment value.
So, a 0.25% increase in annual fees cost you a 10% decrease in your investment portfolio.
1% annual fees reduce your portfolio value by nearly $30,000, compared to a portfolio with only 0.25% annual fees.
$30,000 is 30% of your total investment value.
Let’s put this in perspective, too
So, a 0.75% increase in annual fees cost you a 30% decrease in your investment portfolio.
My advice for you is that STAY AWAY from mutual funds and ONLY invest in stock market index ETFs with very low all-in annual fees (i.e. expense ratios)
So, how and where do you buy market index ETFs?
One of the most reputable ETF providers is Vanguard.
Once you open your investment account with any stock brokerage or investment apps, you should be able to find ETFs in the investment products they offer.
Just like I said earlier, you can start investing with just a couple of hundred dollars a month.
The key to success in investing is consistency and discipline.
So, can you commit to putting a couple of hundred dollars every month into your investment account for not just the next 3 years or 5 years but the next 10 years or 20 years?
Recommended Resources To Help You Make Money In Stock Market
So, to make money from the stock market, you first need to know what good stocks you can invest in.
But, no one can possibly scan the entire stock market for good investment opportunities because you simply don’t have the time. (by the way, there are close to 4,000 stocks listed on US stock exchanges alone)
Also, there are always other people who have more knowledge and experience in a particular industry than you, so you would probably miss some great stock ideas that are hard to discover on your own.
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If you are wondering what to do with your money, the best way is to start investing early. The earlier you start investing even if you just have $1000, the sooner you can start taking advantage of the power of compounding to grow your wealth.