One of the biggest myths about stock investing is that you need a lot of money to get started. Without a nice chunk of capital, you might think there’s no point in investing at all.
If you feel this way, you’re not alone. According to a 2017 Merrill Edge survey, 66% of millennials will rely on their savings accounts for their financial futures rather than investing in the stock market. However, according to 2018 research from the National Institute on Retirement Security (NIRS), 47% of millennials are worried they won’t be able to retire when they want. And there’s a good chance you won’t reach your retirement goals unless you invest in stocks.
So, what can you do if you’re trying to invest for your future and don’t have much money? American College of Financial Services CEO and President Robert R. Johnson, CFA, has some strategies you can use, even if you have very little to invest:
Profit from your employer’s plan
“The first thing you should do is maximize your contribution to an employer-sponsored retirement plan,” Johnson said. Many people don’t realize the investment options in these funds are stock mutual funds, he said. If you already put money into your employer’s plan, you’re an investor.
“Try to contribute the maximum amount the employer will match,” Johnson suggested. “Essentially, not contributing to a 401(k) with a matching element is like turning down a raise.”
The money you assign to the plan comes directly out of your paycheck, making it easier to invest without the need to take an active role. Figure out how much of each paycheck you can put toward your 401(k). Even if your employer doesn’t offer a matching contribution, this can be an excellent way to get started as an investor (and get a jump-start on retirement).
Invest in funds, not stocks
When deciding how to invest in stocks with $100 or less, you need to maximize your choices. Johnson said that stock picking is not the answer: It’s inefficient, and you could easily make the wrong decision. Besides, some of the hottest stocks cost enough that your $100 isn’t going to go very far.
“A broadly diversified, low-fee ETF [exchange-traded fund] or mutual fund — for example, one that tracks the S&P 500 — is a wonderful choice,” Johnson said. ETFs and mutual funds represent collections of investments. With one share, you have access to hundreds or even thousands of securities.
When you invest using funds, you have exposure to a wide swath of the market. Instead of seeing your fortunes rise or fall based on the performances of one or two stocks, you can ride the wave of general market gains over time. This offers a way to limit some of the risks of stock investing.
Realize, though, that there’s always the chance you’ll lose some money. You could see your portfolio fall in value in the short term. But as the chart below shows, stocks generally do well over the long haul despite this short-term volatility.
Focus on asset allocation
Over time, stocks as a group see an average annual return of right around 10%, according to Johnson. “Government and corporate bonds return around 6%, while cash is in the neighborhood of 3%,” he said.
You have a higher chance of reaching your goals with stocks, and when you focus on a significant portion of the market, you are more likely to be successful over time. The composition of your portfolio — in terms of stocks versus bonds or other investments — is called your “asset allocation”. And as Johnson noted, academic studies have shown that your asset allocation matters more than the individual investments.
Unfortunately, he said, too many millennials have an asset allocation similar to the World War II generation. “Younger investors with long time horizons are overly cautious with respect to their asset allocation,” Johnson said. You’ll get the best bang for your buck in the long run if you invest mostly in stocks now. Johnson even suggested that workers at the beginning of their careers could be 100% invested in stocks, as long as they are using ETFs or mutual funds.
Use the right tools
Johnson also pointed to a large number of tools available to help you start investing, no matter how little money you have. One example is Acorns, an app that allows you to round up your purchases to the nearest dollar and then invest the spare change in ETFs.
Betterment is a robo-advisor that helps you invest in ETFs with as little as $100 per month. Another app, Robinhood, also allows you to invest, no matter how little money you have. Robinhood focuses on individual stocks, but you can also choose to invest in ETFs since they trade like stocks. WiseBanyan is another free advisor that creates a portfolio for you, even if you don’t have much money to begin with.
Start investing in stocks today
“The most important decision you can make with respect to investing is the decision to start,” said Johnson. Thanks to the tools available, it’s possible to do that — even if you can only spare your pocket change.
By using a strategy that includes mutual funds and ETFs, and that focuses on your 401(k) or other accounts offered by innovative financial companies, you have the chance to grow your wealth.
While you might not be able to invest very much today, it’s worth getting started. As your finances improve and you free up more money in your budget, you can increase your contributions and see even better results.
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