George emailed me and asked the following question: “I am a young person just starting my career and want to start investing. I like the dividend approach, however I only have $1000 available to invest right now and then maximum $50 per month for the rest of the year. What would you do if you were me? I am from the U.S. and do not plan to access this money for many years to come.”[ad#tdg-embedded]
George’s question is one I get quite often. How to start investing with a small amount of money. Although I am not an investment advisor, or registered to offer investment advice I can provide insight on what I would do. Let’s break it down into a couple of steps:
1. Invest the $1000 in a good low cost index fund
The first thing to do is to figure out how to invest that $1000. Theoretically, George could invest that $1000 over a period of time, breaking that $1000 into $83 investments. This would allow him to buy at the market highs and lows over the months he invests the money and not run the risk of investing all that money at a point in time, which may be a market high (you never know).
Alternatively, he could simply invest it all in one go and be done with it taking the risk.
There is good research that provides evidence that it is better to simply do a lump-sum investment as opposed to dollar cost averaging. The thinking is that it gets all of that money working for you right away and over long periods of time any timing issues created by investing at absolutely the wrong time will be erased.
With the understanding that the $1000 will be invested all at once, the question of what to invest in needs to be addressed. George says he likes the dividend approach. In my opinion, with only $1000 to invest individual dividend stocks are out of the question. There is no way to properly diversify a portfolio with only $1000. With low $4.95 commissions to buy a stock, the most he could buy is 2 dividend stocks which is not enough to provide adequate diversification.
Instead, my approach is always to start to build a core portfolio of quality low cost index funds, building up to a diversified asset allocation. Since we are talking about $1000, I personally would start by buying a U.S. Total Market Index fund. Over time as George gets more money hey can start to add other asset classes (bonds, small-caps, international equity) to achieve good diversification.
Since George is going to be putting an additional $50 to work on a monthly basis, it might be wise to buy an index fund that also allows for monthly contributions of $50 per month. Two good alternatives to consider are Vanguard or TD eFunds in Canada.
2. Set up an Automatic Investment Plan into an Index Fund for $50 per month
Now that that first $1000 is invested, we can move on to what to do with that $50 per month George also wants to invest. What I would do is simply add that $50 per month into the same fund the $1000 went into.
As time goes on and George has more money available to invest, he can then add those additional funds to other index funds rounding out that asset allocation.
Summary
George’s question is quite common but is rather easy to address. Investing does not need to be complicated. The key to starting out is to set the right foundation – low cost index funds in a core portfolio. Once more money becomes available over time, you can diversify into more asset classes.
I’m in the process of possibly buying some ETFs for my portfolio and for diversification purposes. A nice index fund could do the job for me with a $1000 bucks to park somewhere.
Nice post.
I vote for #2. Dump the grand into a good index fund and then DCA in subsequent months. Get that money working and then in a few short years, start buying some dividend payers; like JNJ. Good post. I always enjoy reading the “if I had $1000”. I’m trying to save hard for my $1000 to add to my bank stock DRIPs.
You are not able to do much with just $1000.
Just place it at Money Market fund until you save enough to invest into other investment vehicles.
Ok I am confused here and am going to disagree.
If your friend has $1000 why isnt that enough to diversify? Presumably because you dont want to pay too much as a % for trading fees which I can understand. But it sounds like you are advocating adding $50 at a time into the ETF which would charge a $5 fee each time sending his fee % through the rough at 10%? Maybe I am missing something but these two statements seem to contradict.
When is your friend needing the money? If its for retirement then he wont be needing it for awhile (I’m guessing here that he isnt in his 50s). It doesnt really matter if you are diversified now IF (thats a big if) its retirement income through DRIP investing that is his strategy and if he is sticking to the solid div-net advised companies (JNJ for example as Financial cents mentioned which I agree).
Otherwise if he is to wait until he can diversify before getting anything but a single etf then at $50/month he could be waiting 10 years based upon your $500 per purchase model.
Hi Rhianni,
I think that $1000 is enough to diversify, if the investor using an ETF or an index fund where you could do a lump sum and then monthly contributions. I do not recommend that people buy $50 in ETFs every month.
Thanks for the comment.
If you invested $1,000.- on Jan. 1, 1980 in Johnson & Johnson,
. . . you would have received
. . . 14 shares of stock.
Then if you signed up for their
. . . “Dividend Re-Investment Program (DRIP),” & did nothing elce,
. . . today you would own
. . . 1,261 shares of stock worth
. . . $81,200.97
http://www.investor.jnj.com/calculator.cfm?PostBack=1&initialAmnt=1000.00&calc_method=amnt&historic_Month=1&historic_Day=1&historic_Year=1980&ReinvestDividends=1&Submit=Calculate
If you added $50.- a month to that,
. . . you would not have to pay any broker or management fee’s, &
. . . ‘compounding’ would have made you, much, much, RICHER!
If he was truly intent on buying individual stocks, he could open a Roth IRA (tax free growth) with an online broker, which would get him upwards of 30 free trades (lots of deals like this), allocate $200 into 5 separate dividend paying companies at 0 initial commission cost (free trades). From there, he could take his $50 a month and put it in a savings account until he accumulates $500 (10 months). Then transfer to the Roth IRA ($500/$10 trade [there are lower available] = 2%) and purchase either a new stock or one of the 5 he already has – whichever is best value (initial price is important whenever investing). Since his dividends at first will be in measly sums, he should automatically reinvest all dividends. He should also be participating in his companies 401k plan (index funds). Ideally, he should find a way to save more than $50 a month. Since he is a “young” investor, now is the time to try and find a way to save in order to allow time and compounding to help you achieve financial independence later.