How to Invest Small Amounts of Money

The good news is that even small investments grow, especially if you invest regularly. In fact in some cases regular investment is the best way to get good growth (see below).

Let’s start with the bad news: there are some hazards small investors face that are specific to them.

First, the very fact that you have only a little money to invest probably indicates that you do not have much money and cannot afford to lose your investment. The guy investing thousands can probably afford to lose a few hundred, sometimes more. However if you have less than a couple of hundred dollars to invest, a loss of 25% of that investment may really put you in a bind. That means you must invest carefully and be confident that your investment will not lose money.

Second, it costs to invest in certain things such as stocks. That cost is less now with web-based investing but it is still there. It may cost $10 to buy stock. That is peanuts to the large investor. However, to the guy with only a couple of hundred, it may represent his return for an entire year.

Third, many investment companies are not interested in small accounts. In fact mutual funds often have a minimum investment which may be more than the small investor can pony up. You may have to save up before investing in things like the stock market.

That said, there is no reason you cannot invest a small amount of money profitably. You will have to do it differently than the big investor, but you can do it. Furthermore, that small investment can grow and become a large investment. However you have to be careful how you do it.

The first step is to make sure your immediate needs are met. Food, housing, clothing, medical expenses etc. get first call. Then set aside something for emergencies. Emergency funds should be in passbook savings or something similar where you can get them quickly when you need them. Once that is done, look at where you can invest for the long term.

Where do you put the long term investments? That depends on how much you are investing but don’t overlook the same institution where your savings are. In fact your investment might initially go into a passbook account but it is usually better to put it into a certificate of deposit (CD) which pays higher interest. And do look at joining a credit union instead of dealing with a commercial bank. Credit unions don’t have to make a profit so they tend to treat their members better than a commercial bank treats the owner of small accounts.

Once you have an emergency fund and a couple of hundred bucks beyond that, you can look at other investments. Common stocks are probably the best for the long term but they are somewhat volatile. The price of any stock tends to rise and fall, some more than others. Furthermore, the odd company fails completely. If you’ve put all your money in one company and it goes under, you are left with nothing. The small investor absolutely *must* avoid “putting all his eggs in one basket.” However neither does the small investor have the money to buy stock in lots of different companies. What to do?

The solution is a mutual fund. This fund pools the money from hundreds or thousands of investors so it can buy into lots of companies. There are several types of such funds, but I recommend what are called index funds. These buy all the stocks on something like the Standard and Poor’s index of 500 stocks. Management fees are low and those funds usually beat the so-called managed funds.

Even for index funds or other mutual funds you need to be careful. The stock market goes up and down. Don’t put any money there that you will need for the next couple of years. Invest money in the stock market only with the expectation of leaving it there for at least 5 years.

How do you invest? As mentioned above, you can put money regularly into the fund. This has the big advantage that you tend to buy more shares when the price is low and fewer when it is high. For example suppose a stock price varies between $10 and $20 per share. You put in $40 per month. One month the price is $20 so you get 2 shares. The next month the price is $10 so you get 4 shares. You bought twice as many shares at the lower price as at the higher price.

I will caution you against trying to deliberately time the market, however. Even the professional investors don’t do a good job of that. They may see a price that has dropped and buy, but there is no guarantee the price won’t continue to drop. I have personal experience with this. The price of stock for a company where I used to work hit a high of about $90 during the late 90’s (the “ bubble though it was not a stock). It dropped to $50 and I bought more. It continued downward and is now at $34 per share (after a low of about $20).

So invest carefully, but by all means invest. Even small investments, made over 20 to 40 years can grow to very large nest eggs.