How to Invest Small Sums of Money
Investing money isn't just for high-rollers and risk-takers. Anyone with a piggy bank can invest in the stock market if they know where to put those nickels and dimes.
Here are some tips from industry professionals on how and when to invest small amounts of money.
Invest in Mutual Funds
Mutual Funds and 401(k) plans are great places to start for people looking to invest small amounts over time, according to senior portfolio manager Mike Binger of Gradient Investments in Minneapolis.
Binger says that many mutual fund companies will allow you to set up an account for as low as a $25.00 investment per month.
It's all about the commitment, according to Binger. "Make a savings commitment . . . and honor that commitment for many years," he said. "Leaving money in the market and letting it grow has been a winning combination throughout the market cycles."
What are Mutual Funds?
Curtis Chambers, founder of the Chambers Financial Group in Clearwater, Fla., defines mutual funds as a bucket filled with stocks. Each mutual fund can own "anywhere from 40 to 300 stocks," Chambers said.
The stocks in a mutual fund are managed by a professional money manager who may add new stocks to the mix or take out ones that aren't doing well. Chambers says by using mutual funds, investors get the benefit of holding a large number of securities, while having a professional manage them.
Make the Right Investments for Your age
The goals of 30-year-old and 60-year-old investors are different, so make sure to plan appropriately, no matter what side of the spectrum you're on.
For young investors, Binger said the investment statements should be growth oriented and equity exposed, meaning they should focus on stocks whose capital will grow over time as opposed to seeking a quick payoff.
Binger says that by looking to the future, young investors can use time to their advantage to get the most out of their investment. He said that "history has shown us that stocks have much higher returns over time than fixed income and inflation."
When closer to the 60-year-old mark, investors should be focused on generating income off the capital they gained through smaller investments during their younger years, Binger says.
According to Binger, investors closer to retiring should invest in fixed-income securities. Fixed income securities give investors regular payments over a fixed amount of time instead of one big pay off. The fixed income markets are more stable and should produce the income needed to live on.
Have Appropriate Expectations
Binger says that to know if your investment is doing well, you need to know what kind of results to expect
Use the appropriate benchmarks for your type of investments. Comparing different kinds of investments can be like comparing apples and oranges, so make sure you're giving your investment a fair chance to succeed before pulling out.
What to do when things look bad
If your stocks aren't performing as well as you'd hoped, don't panic. Investing in small amounts is more about the payoff over time than what's going into your pocket today. Binger suggests continuing to invest at a steady pace and going with the ups and downs of the market.