When you have a small amount of money, the best way to get big returns is to invest it over a long period of time. Compound interest takes a while to work, but it’s the best way to make a small, safe, and reasonable investment pay off. Just make sure that you pick a stable, relatively low-risk investment, such as bonds or a mutual fund.
Invest over a long time frame
If you only have a few dollars a week to invest, pick investments that will grow over time. Purchasing a small amount of a stock or mutual fund every week ensures that you’ll be purchasing a lot of stock when prices are low, and less stock when prices are high. This strategy ensures that you’ll get the maximum possible return on your money.
Invest small amounts over time
One of the biggest things that can hurt small investors are the fees charged by brokerages. High percentage fees can eat away at the value of your money over time. Because brokers take their fees whether your account is up or down, it’s next to impossible to get ahead over a long period of time. Look for investments that offer fees of less than 1% over time.
Pick low-fee investments
One of the most common pitfalls that small investors make is that they want to put everything into a high risk investment in the hopes of making a big gain very quickly. In fact, this strategy rarely works, and instead leaves the investor with virtually nothing. Avoid picking “get rich quick” accounts and instead look for highly diverse investments with low fees.
Consider your risk carefully
The federal government has set up a number of accounts and programs to help small investors. Roth IRAs and 401(k)s were originally designed to help Americans prepare for their retirement. Because of this, you don’t have to pay taxes on the money going into these accounts. If you’re a typical taxpayer, that means that you’re essentially earning 15% or more on your investment just from the tax advantage alone. There are a variety of investments that you can make within these accounts, giving you a lot of options for your money. Also be sure to research other ways the money in these accounts can be used, such as financing higher education or buying a home.
Take advantage of tax-advantaged accounts
When you have a small amount to invest, it’s important to keep your investments diverse. This enables you to have at least one account that is making money, even when the other ones are contracting. Try for a mix of bonds, stocks, and other investments such as commodities and real estate. As your portfolio grows, you can eliminate the low performers and find funds with better return rates. You may also want to consider reinvesting a small part of your money into more exotic investments as time goes on.
Look at ways to create multiple income streams
It can be very tempting for small investors to take out loans in order to increase the pool of money that they have to invest. These loans tend to come at high interest rates, however, that can eat through your potential profits. Furthermore, if you start to lose money, you greatly diminish your investment by having to pay back the loan. Avoid taking on debt to make money, and stick to just making smaller investments with you available cash.
Stay out of debt
Often, small investors make the mistake of putting their money into something simply because larger investors are doing so. The problem with this strategy is that by the time a small investor hears about someone making a lot of money, the real opportunity has already passed. In fact, small investors are often targets for larger investors who need to unload unprofitable investments. To avoid problems, stick to the strategies that you know work, and ignore what everyone else is doing.
Don’t follow the herd
When you have to rely on a financial advisor to tell you where to put your money, you are limited to only what he or she wants to sell you. The best thing a small investor can do for him or herself is learn as much as possible about investing. Learn about your options, strategies, and the ideas that experts have about why those strategies will or won’t work in the future. The goal is to get the point where you can invest without relying on anyone else’s plan or advice. This wa,y you can personalize your investment strategy to meet you needs.