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?
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®
$5,000 invested for the future is best served through a Target-Date Fund of low cost, passively managed index funds. If those aren’t available for whatever reason, passively managed index based ETFs are a great way to go as well.
With $5,000, it would be hard to diversify your portfolio if you were only investing in individual stocks and bonds. The best thing to do would be to start with some ETFs. Most mutual funds have minimum investments of at least $1,000 - $2,500, but not ETFs. Find a broad range of low-cost ETFs that cover different asset classes (large cap, mid cap, small cap, international, emerging market, bonds) and start investing in those. As you begin building up capital to invest, you can replace an ETF that represents an asset class with a few stocks. For example, you could sell your large cap ETF and replace it with a few large cap individual stocks that you like.
For now, until you have more experience and more capital, I would go with some ETFs.
Clearly your financial plan should be focused primarily on maximizing savings in order to add to your investment portfolio.That said, at $5,000, you can still replicate much of the same strategies that are being implemented in larger portfolios, but with one major caveat: you need to be much more vigilant in managing trading costs.
As a basic example, it costs the same trading commission to buy $5,000 worth of a mutual fund or $500,000 (assuming no-load funds, which should be a prerequisite if you're looking at mutual funds). If you were to be able to add, say, $100 per month to your portfolio, you don't also want to be paying $20 each time you invest these funds, as you'd only end up with $80 of the investment and this $80 would have to earn 25% return in order to just get you back to the $100 you started with.
Thus, I'd look for commission-free investments at the custodian you choose and do everything possible to maximize your savings. As your portfolio grows, the relative impact of these costs will also be reduced.
There is no single solution for investors, so please take this as purely informational and be sure to visit with your advisor or myself before making any changes to your plan.
Adam C. Harding, CFP
I would recommend that you research global portfolio funds. Vanguard, for example, has a Vanguard Global Equity Fund (VHGEX) that invests in companies around the world within one fund. The minimum initial investment is $3,000 and it has a very low expense ratio. This type of fund gives you the opportunity for diversification with a small amount of start up.