If you have 1000 dollars and do not know where to invest, your objective could be one among the following. You bet me wrong.
Case 1: You want to try something new. You had not made any serious investment before and wanted to try and learn new things.
Case 2: You are a responsible person who wants to save or grow your money for the future. However, you do not have enough money to invest. You live from payday to payday. However, out of determination, you have cut down your expenses and have 1000 dollars in hand today. You want to invest consistently month on month. You believe, though 1000 dollars is a small sum, by being consistent on a monthly basis, you will be able to grow your investments.
Case 3: You draw inspiration from the greatest of the greats who grown their investments from few humble dollars to billions in their lifetime. The people we are speaking about are the likes of Warren Buffet and Ben Graham. You looked to them and wanted to be like them if that is earthly possible. You are hearing their stories and are tempted by the passive nature of their massive earnings over time. You want to be like them. However, you do not have the conviction and sufficient knowledge to start investing right away. To make matters worse, you can afford only a 1000 dollars right now.
If you fall in any of the above three categories, this post is only for you. I have made best efforts to simplify some of the most complex concepts.
When it comes to investing, there are two types. One is to grow your net worth directly on a monetary basis, while the other is to build your skills. (Yes, the investment may not even be directly related to picking good stocks or right investment vehicles, but can be even updating your skills so that you can move on to a higher paying day job.)
In this post, you will find five ways (choices) to invest thousand dollars. These are so easy that you do not have to learn much to start. Another good thing is that you can start right today or even in the next 1 hour. Some are risky by nature, but the risks are limited because of the simple truth that you are not going to invest billions. However, the principles are the same with 1000 dollars as with billion dollars and hence the article is utterly necessary.
You are not going to own a hundred thousand shares with 1000$. However, you can buy very few shares at the maximum (for example, ten shares if a company has a share price of $10). Even if you do that, you run the risk of losing a lot, as the risk associated with investing in only one company is high. The only exception can be solid blue chips that have shown resilience in even hard days of stock market history. Nevertheless, if someone advises you to invest in a single stock with 1000$, it is not good advice. However, you want to invest in stocks but still do not want to face the risks? In that case, you can smartly choose pooled investments like mutual funds.
What are mutual funds by the way? In simplest terms, someone else is going to manage the money for you. They collect payments from thousands of people and invest them in a variety of stocks and asset classes. These are certified financial planner guys with MBA degrees. Hence, they know what they are doing. They actively watch for stock market trends and change the asset allocation regularly so that the pooled investments grow and do not fall over time. These funds share the capital gains among the investors proportionately. The active fund managers take a commission out of your money as their fees. You will find MFs easy because you do not have to perform an in-depth fundamental or technical analysis which will be in turn done for you by the managers. You can invest your money and forget. You can then check the trends once in a month.
However, there is one catch. Mutual funds are always subject to market risks as like any other investments. For example, if the fund manager has invested in 100 companies and if most of them fail to rise due to some macroeconomic reason like a recession, the entire mutual fund is going to fall. (Though not as much as individual top loser companies). Hence, there are risks, but you can hope for rewards if you choose your fund wisely. Every fund operates under some core principle. For example, there can be specific mutual funds for the financial sector, health care and so on. For example, if you consider a healthcare mutual fund, the money will be invested in healthcare and pharma companies. If you firmly believe that as a sector healthcare is going to keep growing ever; then you will be well off choosing those funds.
Mutual funds, in addition to providing a balanced portfolio advantage, have another significant benefit. When you periodically buy a certain number of shares for a fixed amount of money each month, the average share price will be resistant to volatility and possibly be lower than future stock prices. This is called dollar cost averaging. To know more about this, you check the Investopedia page on this.
ETFs or Exchange Traded Funds
ETFs became popular only during the later half of the 20th century. These are very similar to mutual funds, but they have a fundamental difference. No active managers are going to work for you. Instead, these funds are designed to track familiar indices. For example, you know S&P 500 index is a weighted average of all the 500 composite companies. The contribution by every company to this index is directly dependent on its financial performance at any point in time. If an ETF is designed to track S&P 500, then its stock or asset allocation pattern will be closely (if not identical) to that of the underlying companies contribution at the corresponding time. Thus instead of MBA financial planners, what is needed is a sophisticated algorithm that adjusts the stock allocation pattern as per the index. Thus, if the index rises, the ETFs do rise and vice versa. For your information, the S&P 500 index, disregarding the short-term volatilities has consistently grown several folds in the last 50 years.
Tip: Consistency is Power
The above two investment vehicles are very powerful if you can invest consistently month on month, year on year and so on. Over a period, you would have grown your money by several folds while reducing risks associated with volatility.
CDs and Retirement Funds
Even after reading about mutual funds and ETFs, you could still be averse to the idea of investing in stocks directly or indirectly. You may want a hundred percent guarantee that your money will grow though not in aggressive fashion. You do not want to risk your 1000$ but instead, want a stable growth even if it takes time. In that case, a bank CD will do just fine. Here the interest rates could be as low as 1%, but one thing is sure. You will never lose your money. This type of deposit will be particularly helpful towards your emergency funds.
The other riskless investment opportunity is towards retirement funds. They not only are risk-free but will help you for sure when you enter your sixties or seventies. You will be able to lead a respectable life then. They are not highly rewarding regarding interests or capital gains but are tax-free.
Usually, financial advisors will not ask you to invest in stocks. However, I am going to differ here. You can invest in stocks if you do not worry losing but wanted to learn by practice. There is no other good teacher than practically working at something. After buying some stock, you can start monitoring the company’s financial statements, daily, weekly and monthly share price movements and the impact of global and national events on the price movements. This will be a good training playground for your future investments.
Above all the other investment options, the conventional wisdom says you have to grow your income to invest in the first place. To improve your income, you have to upgrade your skills to the contemporary level. By a quick look at job sites or even through local community discussions, you should be able to recognize quickly the high paying jobs matching your abilities. You can then learn and adapt skills required for those new kinds of employment and switch. This will increase your monthly income and will give ample money to invest in the long run. You should consider investing in soft skills if you are worried that your monthly expenses will overrun your income.
For example, you could use your 1000$ to learn a new technology, new programming language and more.
Hopefully, the above post helped you get a good idea of investing options for small amounts of money.