Have you been wondering what to invest small amount of money in?
Disclaimer: None of this article or anything on this website should be taken as investment advice, whether good or bad. Please check with your financial advisor before making any investment decisions to ensure they are suitable for you.
Before we plunge into all the meaningful investments you can make with a small amount of money, the question itself expresses a common perception. That perception is that the really good and profitable investments are only open to you if you have big money.
There is some truth in that. Some investments are only open to accredited investors, and the requirements to be accepted as an accredited investor are:
- for individuals an annual income over $200,000, or couples, over $300,000 for at least 2 years, or
- a net worth of over $1 million, or
- be otherwise qualified as a financial professional.
However, I would argue this notion that the really good stuff is the exclusive preserve of big money is overblown. There are many ways that the reverse is actually the case.
Many very good investments only work with comparatively small amounts of money. An example of this is low-priced thinly traded stocks. If you pile in with a large order you will move the price up and find yourself paying more than you probably had planned.
This general principle applies in other areas too. Where markets are narrow, in penny or micro-cap stocks for example working with only small amounts of money can be an advantage.
So let’s jump in with some great ways to invest small sums of money . . .
Passive index-linked ETFs
This is an easy one. Though you could ask the question, so which particular passive index-linked ETF or ETFs should I go for? I’m sure you can guess the response to that – it depends.
The simple and easy thing to do is to pick a low-cost ETF that passively tracks the large-cap market index, the Standard and Poor’s 500 Index. That is about as simple as you can get.
It is maybe worth pointing out that in the current market, you can see more and more signs that we are at or close to a market top. If that is the way the market goes over the coming months then if you were to start right now investing in a large-cap tracking index fund the results you see over the next year or so may not be exciting.
However, that does not change the statistical likelihood that regular investing into a low-cost large-cap index-tracking fund is a good approach for you.
Add more indexes
A next step up would be to add a mid-cap and/or a small-cap index-tracking fund. There are also well-known seasonal effects, for example in the first eight or nine months of the calendar year when small-cap stocks tend to outperform large-cap stocks.
The reverse also applies. In the last few months of the calendar year, large-cap tends to outperform small-cap. This is because large institutions seek higher gains from small-cap stocks early in the year to achieve their profit targets. Then in the last few months of the year, they move back into the safety of large-cap to protect their profits.
It’s not great I know when you think about it, but this is a function of how fund managers are compensated.
So if you wanted you could shift a percentage of your holdings in a large-cap ETF into a small-cap ETF leading into the time when small-cap does well. Alternatively, if you are investing small regular sums, you could give more weight to small-cap at the beginning of the calendar year and then more weight to large-cap towards the end of the calendar year.
This isn’t always going to happen though. As soon as these kinds of effects seem to establish themselves, the market tends to uproot them. We shall see.
Refine your strategy
Something else you can do with good old regular Exchange-Traded Funds is buying funds that give you exposure to a specific strategy or a mix of strategies.
Such strategies can be broad like growth, value, or income or specific to a geographical region, like Latin American growth, or emerging Asian markets. You will also find very targetted funds specific to particular industries or commodities.
Exchange-Traded Funds emerge these days with stunning rapidity to capitalize on investor interest in new technologies such as blockchain ETFs, or windpower ETFs, or ETFs specific to parts of the biotech industry.
So you can add a particular strategy or direction to your investments by adding any of these broad or narrowly focussed ETFs.
You’ll need a broker
If you want to start investing small sums of money in ETFs or even specific stocks, you will need a brokerage account.
If you are going to be investing with small sums of money, then make sure that your broker allows you to buy fractional shares and has an ETF screener that will allow you to sort by sector, industry, asset class, geographical region, etc. You should also be looking for low or no fees or commissions on ETFs and regular exchange-listed stocks. Honestly, there is no reason to be paying commissions on ETF or stock trades in today’s world.
Real estate is a whole other asset class you can invest in with small sums of money. You can open an account with a private real Estate Investment Trust, or REIT crowdfunding sites such as MyHappyNest or Diversyfund and start investing with regular small payments.
This is an excellent way to build a position in real estate that will provide you with an income stream. I think this is particularly advantageous for someone starting on their investing journey. Small regular contributions into one of these platforms can be automated. You will be steadily building over time a position in an asset class that will not gyrate in value with the stock market.
There are other private REIT crowdfunding sites but often the minimum account sizes are larger than for MyHappyNest or Diversyfund. With these two the entry-level minimums are very low indeed.
You can start investing in real estate with MyHappyNest with as little as $10 and you can start investing with Diversyfund with only $500.
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Use options to replace stocks
If you are looking for a way to turbocharge a small portfolio, one approach is to invest in options rather than in stocks. This can be a much higher risk approach than steadily accumulating positions in index-linked ETFs. Also if you are working with very small sums you may not have enough to buy some options that you would want to.
There is another important hurdle you will need to clear. You will need your broker to approve your account for options trading. Since here we are just talking about using options to replace taking positions in stocks, you will need a level of approval for options trading that allows you to take long positions in call options at a minimum.
Each broker has slightly different ways of defining levels of approval for options trading, but they are broadly similar. Approval to take long positions in call and put options will usually be around the second level of approval.
To be approved for options trading you will have to tell your broker your experience with investing, your level of financial education and knowledge, and the size of your account. With a very small account, you will be starting with an obvious disadvantage but if you can compensate with experience and/or knowledge you may be able to squeak through with enough to buy calls and puts.
Buying options with small $ sums
I will say that this is possible but I will not pretend this is easy to manage well and properly control risks. Using options adds leverage to your account and this makes risk management that much more important.
Risk management is always going to be important but the added leverage from holding options positions will increase your likelihood of loss. You will have to manage that carefully to avoid being wiped out.
I would not want to pretend otherwise, but losing your entire account is a possibility if you take many options positions and do not carefully manage risks.
Options on ETFs
Now some good news.
Many of the ETFs that track major market indexes and those that track industry sectors have very well traded and therefore liquid options.
Let’s take a look at the current prices for the State Street Standard and Poor’s 500, sector ETFs. Then, using the stock replacement approach, let’s look at the cost of a call option that still has about 4 months before expiration and a delta as close to 0.75 as we can find. This is what we find.
1)Data source: E*Trade, all calculations and tables Bad Investment Advice
This is a snapshot of prices on 18 May 2021 but it illustrates a point. We could own a call option on a sector ETF for between just over $100 to just over $1,750 depending on the sector. Compare that cost with owning 100 shares in any of these ETFs and you can see the potential advantage.
Let’s remember that the stock replacement strategy gives us exposure to price movements of 100 shares of an underlying stock at a much lower price. So then the question becomes, which sectors should we buy?
Sector relative performance
So let’s imagine that we have a few thousand dollars to invest and we want to take stock replacement style positions in the three strongest sectors at the moment. Here is a chart that compares the relative performance of the State Street Standard and Poor’s 500 Index Sector ETFs we listed.
We should look at the relative performance since early November 2020 after the US election as there we see a fairly consistent picture. What’s more, the sectors that have been performing well compared to the others changed noticeably immediately after the election. Here is what that looks like.
This has a lot of information, but we can see that the three strongest sectors since early November 2020 have been: energy, financials, and materials. This column chart shows this more clearly.
Though it is reassuring to see the column chart, the line chart is going to reveal any potential trends. For example, we can see that between early March and around 22 April 2021, energy gave back a lot of its earlier gains during a period when all the other sectors maintained a steady upward trend.
Be that as it may, for the sake of this exercise, we could buy call a single option in each of the three strongest sector funds, i.e. energy XLE $740, financials XLF $355, and materials XLB $992 at a total cost of $2,087.
Disclaimer again: None of this article or anything on this website should be taken as investment advice, whether good or bad. Please check with your financial advisor before making any investment decisions to ensure they are suitable for you.
Following the stock replacement strategy, we would re-examine the relative performance and relative strength of these sector funds every month. Once an option moves beyond a delta of 0.85 we would roll back to an option with a delta of 0.75. Also once the expiration date is less than 90 days away we would roll to an option with a delta of 0.75 but with about 5 to 6 months to expiration.
Starting small with CDs
For the very risk-averse who want to avoid the rocky road of stocks or even wilder ride afforded by options, Certificates of Deposit, or CDs is a route you can take.
You should always shop around for the best CD rates you can find. But now you will need to apply another filter that you will select CDs with a low entry price.
CDs can be bought from most brokers and most banks, and many can be bought for as little as $100 though often you will see minimums of $500 or $1,000.
Everything else you should have done
Since we are talking about investing small sums of money, something we should always be doing is investing in ourselves. There are many ways you can do this. Investing in your education is an obvious one.
Many variables determine the return on investment of higher education. Years ago the generally accepted wisdom was that a degree would make the difference of around $1 million over a lifetime of earning. With the current cost of higher education and associated mountains of student loan debt that may not always work out quite as well.
Nevertheless, in most professional spheres, higher education will pay off.
Pay off any high-interest debt, like credit card debt is something else you should do as and when you start investing.
Something else you should do if you have a job and your employer offers any kind of matching of your contributions to a retirement fund – make the most of it. Max out your employer’s retirement matching savings program.
Invest in your own business
For some enterprising people, this might actually be the first thing they think of doing with spare investable funds. There are many kinds of small businesses you can start for small amounts of money.
Affiliate marketing is one kind of small business that you can start at a very low cost. Wealthy Affiliate is overall the best one-stop-shop for learning and doing affiliate marketing.
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You as an investor
It may seem counter-intuitive if you are casting around looking for advice on where to invest small sums of money, but one of the most important things you need to do is understand what kinds of investments you are comfortable with.
You need to get a handle on your risk tolerance your risk appetite. You need to be honest with yourself about your level of financial sophistication and your level of involvement in the process of investing itself.
Questions and answers
Q. What should a beginner invest in?
A. That depends on your risk tolerance and appetite. If you are willing to accept some risk then invest in index-linked ETFs. If you are risk-averse then invest in a mix of CDs but I would suggest you also start investing in a private Real Estate Investment Trust, or REIT.
Q. What type of investment makes the most money?
A. Historically the stock market has outperformed other forms of investment over the long term. There are many examples of people successfully trading and investing in other more speculative financial instruments, including, forex, commodities, high-growth stocks, and lately cryptocurrencies. But there is no evidence to suggest that an average investor is going to make a great deal of money investing or trading in such areas. Those who do succeed either apply a great deal of skill to the task or get lucky, or both.
Q. What are the major types of investment?
A. The major investment types are equities, fixed-interest investments, real estate, and collectibles.
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Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as personalized investment advice, good or bad. You should check with your financial advisor before making any investment decisions to ensure they are suitable for you.
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