We will never repeat this enough; You can never start saving too early! And being a father of three, I can appreciate that savings is not always the top priority when you work on the budget. Not so long ago, I wanted to start a new portfolio for my kids’ education (called an RESP in Canada). My oldest son just turned 9 this summer and college is not too far away. However, between my mortgage payments and retirement savings, I don’t have much cash left to save. This is why I started this portfolio with only $50 per week.
Is $50/Week Enough?
You might think $50/week is not much to start investing, but it’s more than enough. Between a an 30% Gov’t subsidy for education and two good years of market return, my portfolio is now showing a value over $8,500. As you can see, you don’t need a fortune to build an interesting portfolio.
I must admit I made a mistake when I started this portfolio; since I didn’t have much money to start with, I started by investing in mutual funds. When I compare my two portfolios (my self-managed RRSP vs mutual funds in the RESP), I can see that it is a mistake:
| 2013 | YTD | |
| RRSP | 21.70% | 12.50% |
| RESP | 17.23% | 12.09% |
| Difference | 4.47% | 0.41% |
The choice of picking mutual funds cost me about 5% total over almost 2 years. It’s not the end of the world, but still, it is still money I didn’t make. When I realized this; I started working on how to build a portfolio with a small amount. If I had to start over with $0 in hand and savings of $50/week, this is how I would start my portfolio:
#1 Setup an online brokerage account
Well… this may sound obvious for some of you, but as soon as you are committed to start investing, you should open an online brokerage account. You don’t need $10,000 to start investing with a brokerage account; most companies will accept your money, no matter how much you want to save. If you are American, I recommend you start with TradeKing for two reasons: #1 great customer service and #2 the lowest trade commission in the industry ($4.95/trade). It definitely matters a lot if you intent to invest small amounts.
You can check out TradeKing’s account special features here.
If you are Canadian like me, Questrade is the way to go. They offer a USD RRSP (not all brokers do) and they are also the cheapest online broker on this side of the border. They offer promotions when you open an account so check out their website for their latest promotion.
#2 Set up an automatic savings plan in my brokerage account
The first move to make once you have opened your brokerage account is to setup an automatic savings plan in a money market fund or an index fund/ETF if you are more aggressive like me. I don’t like having money sitting on the sidelines. This is why I always prefer to have my small cash amount invested in an index instead of seeing it dying at 1-1.5% in the money market. However, this is up to you; both strategies will lead you to the same point: growing your fund up to $1,000. The $1,000 mark is important because of the transaction fee charged. If you pay $4.95 per trade, this represent 1% on a complete buy and sell transition ($9.90 on $1,000). Since your goal is to keep saving on a weekly basis, I wouldn’t bother buying with a smaller amount on hand (you will eventually have too many stocks with small positions).
#3 While you save; build your “buy list”
As soon as you start saving, build your buy list. At $50/week, you will be able to make your first trade only five months down the road! This is enough to make a list of about ten stocks that will meet your fundamental requirements (you can read mine here) and follow these companies through at least one quarter.
I would personally aim for blue chips that show great diversification such as Procter & Gamble (PG) or Johnson & Johnson (JNJ). They are almost as diversified (product wise and geographic wise) as a mutual fund!
#4 Get your first $1,000 to work for you!
Once you reach $1,000, it’s time to buy your first stock. Make sure you keep your $50/week investment plan in your money market fund or index to make sure you build another $1,000 very fast. You can also use your dividend payouts to build your next $1,000. Since the dividend payout will be very small on a $1,000 investment, dripping at this point is not very useful. Keep in mind that in another five months, you’ll have enough money to buy another stock!
Risk management and diversification is extremely difficult when starting a new portfolio with a small amount. Your investment return for the first two years are pretty much luck as it will be hard to compete against the market with so few positions in hand. In order to help new investors choose their first stocks, I built a starter portfolio with four stocks.
#5 In two years; you’ll have a “real portfolio”
With an annual savings of $2,600, you will get reach a total of five different companies in only two years. At this point, you will have something that looks like a real portfolio and going forward will be easier. The point is to keep buying stocks with your next $1,000 available until you have 10-15 stocks in hand. This will happen after another two-three years of savings. Then, you can add to your existing position through dripping or by adding an extra $1,000 to each of your positions.
It’s a long process but as you can see, you don’t need much money on hand to start investing. Only $50/week is enough to build your nest egg! Now, I have to get moving and sell my funds to start trading for my kids’ future!
Disclaimer: I hold shares of JNJ
$50 a week in to an RESP is one thing. To a limit you will get a boost from the government. $50 a week in to a self directed RRSP is another.
You need to take in to account the buy/sell charges for stock purchases/selling. So buying $50 of stock may not be worth your money as the in/out charges are enormous compared to the potential cap gains. Now waiting till you have $1K before a purchase, as you mention Mike, makes it much more appetizing as your costs are spread out over more shares.
The other thing to consider is that in the beginning you will not have a lot of money to purchase shares and therefore “expensive” stocks such as JNJ ($115 CDN approx) may not be the right route to go. It might be better to buy two $50 stocks versus one JNJ as at least then you can diversify in to two sectors. Once you have bought in then your $50 will be supplemented by dividends either monthly or quarterly.
As an example, I have just started to retain dividends in my TFSA in 2014 as previously the dividends were not sufficient to warrant purchasing stocks during the year. The dividends were withdrawn and used to pay down the HELOC I have. At the start of the following year, Jan, I maxed out the TFSA contribution as well as re-contributed the dividends that had been withdrawn. So I would make one major purcahse in the TFSA per year. The withdrawals were used to paydown the HELOC @ 3% so at least they “paid” me something in a sense.
This year the TFSA dividends are sufficient to warrant retention in the TFSA and as well as making the major ourchase in January I am also now making three other purchases per year which accelerate the dividends in the TFSA. So far I have already surpassed last year’s TFSA dividends and there are three months left of dividends.
Once you get in to a situation where dividends can be re-invested because of the amount available it gets very interesting and the bell curve of dividend paymnets accelerates quite noticeably.
My objective is to increase dividends by 10% per year through maxing the RRSP, maxing the TFSA, dividend increases and dividend re-investments. I am on track for an approx 25% increase in dividends over last year. As of the end of this month I will have surpassed the 10% increase of my objective.
Keep investing.
P.S. The markets are down now. Great time to vet the stocks you have been looking at and, especially if you have a long time horizon, make those purchases. You may miss the low but you will be in the market
I sold JNJ. Missed the high
I bought KMI before the jump.
What has it done for me? KMI has bumped up from where I bought in so as far as missing the high on JNJ there is no difference and I am actaully a bit ahead of the game. As for dividends – they doubled
Great article. As a beginning investor, there is no such thing as too small of a purchase. As you demonstrate, after several purchases regardless of size you will be well on your way to building a diversified portfolio. What I really like about your savings methodology is that $50 a week is a very manageable amount that will not impact your daily life.
Keep it up. You as well on your way to building a large dividend portfolio. The important thing is continuing to invest in styling dividend growth companies. Since you are saving for one large purchase, you really want to make it count!
Bert, one of the Dividend Diplomats