What investment strategies do you recommend for someone with low capital?

What are the best ways to invest $5,000 or less? I feel as if many of the popular investment strategies (Stocks, Bonds, Options, etc.) are only profitable if invested with large amounts of money. Is this true? What are profitable ways in which someone with a low capital can get involved in investing?

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February 2017

You have a few different alternatives,namely mutual funds or ETFs (Exchange Traded Funds). The only real difference is that an exchange traded fund can be traded throughout the day whereas a mutual fund you get the end of the day NAV (net asset value). This won't make a difference to you and I personally would probably go with a couple of ETFs, but both types of funds can offer stock, bond, commodity, options, currency, and even hedging strategies. With some research, you could get exposure to just about any type of strategy you would like.

But keeping it simple, you could invest in the SPDR S&P 500 Index ETF, ticker SPY, which would give you the largest 500 companies in America. You could then add the PowerShares NASDAQ 100, ticker QQQ, which are the largest 100 companies on the NASDAQ like Amazon, Apple, etc. There will be some overlap because the largest NASDAQ companies will also be in the largest 500 companies on the S&P. Lastly, you could invest in the iShares Russell 2000 Small Cap, ticker IWM, which are 2,000 small cap companies.

Depending upon your time horizon and how young you are would determine the market weights and level of aggressiveness. But a diversified exposure would be something like 50% SPY, 30% QQQ, and 20% IWM. There are also bond ETFs and international and emerging market ETFs as well. But with $5K, you can't touch all of the water.

Vanguard even has some very inexpensive Total Market ETFs where with one trade, you can get the "entire stock market" and would another alternative. I would likely shy away from bonds at this particular time due to the prospect of rising interest rates, but that is my opinion.

Now, there is another choice. You could take around $1,000 in each of five individual stocks and spread it across different sectors. I would stay with large, established companies, a couple with strong growth prospects along with a couple industrial, pharmaceutical, etc. You could start with Amazon, Apple, Berkshire Hathaway B Shares, Proctor and Gamble, Merck. Then when you add more money, you could add a couple of other companies and round out your portfolio. This would be a more aggressive strategy but would give you the opportunity to beat the indices over the longer term. But to mitigate risks, it is important that you stay in the strongest companies with strong balance sheets. This way, you are exchanging "if" risks with "when" risks. In other words, you are not worried whether the company will make it or not, you just don't know the exact timing of getting a great price.

That said, the most conventional approach though with your limited capital is to use funds or ETFs for broad exposure, especially if you do not intend to be researching carefully.

Hope this helps, Dan Stewart CFA®

February 2017
February 2017
February 2017
February 2017