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Learning to Invest / Investing Beginners


Subject:  Re: Limited funds Date:  12/27/2018  10:05 AM
Author:  JustMee01 Number:  29208 of 29460

Hi Dianne,

You have $1000. Where should you get started.

IMO, you should start with exactly what you're doing right now. Save more money.

You have the right impulse. But you're not done with step number 1. Step number 1 is saving enough money to get it to work. $1000 is not enough to buy single stocks. You seem to sense this yourself when you wonder if you'll be able to buy enough shares of a single stock for your investment to work. This is close to the right question to ask but not quite all the way there. The number of shares you buy is less relevant than the size of the dollar commitment and the number of companies that you own. Your problem at this level of investment is that you can't assemble a diversified portfolio. This isn't an easy task for someone with experience. It's very difficult for inexperienced investors. You'll want somewhere around ten different companies that don't overlap in risk. They might come from different sectors. They might differ in their exposure to overseas markets. They might have different growth potential. Some might be boring-- some might be high fliers. The point is that their differences make is less likely that your stocks will all slide down in conjunction. That diversification-- their differences-- is what makes is less likely that your entire portfolio can slide back in conjunction. It's your safety net. You just don't have enough to assemble a safe portfolio.


Trading costs primarily. Let's say you do buy shares in ten different companies. That's $100 each. Your commission on that trade might be $5. When you sell that stock, you'll pay another $5 commission to sell it. So, your $10 down on that $100 investment just on trading costs. The stock will have to go up 10% just for you to break even! That won't work for anyone. You can't make money that way for anyone but your brokerage firm. You need to be buying stock lots that keep your costs down to 1% of the purchase price. Preferably lower...

Your first step is to save more money.

Step two is to consider a market tracking ETF, rather than individual stocks. These ETFs are pre-assembled portfolios that contain hundreds, even thousands of stocks. They are held in a trust and you buy a little piece of this trust-- a little piece of a pre-assembled portfolio. Lots of them exist these days. Not all are safe. Stick to ones that track indices like the S&P 500 unless you understand the nuances of the ETF you're buying. Big and boring may not be sexy, but it does the job most efficiently in the long run. You want to be in it for the long haul, not a flash in the pan.

Better yet, many brokers now offer these ETFs with no trading fees:

And I suspect that you will find other brokers with free ETFs as well. A strategy like this can solve your other problems as well. One is timing. What if the market goes down from here? Will you panic? Will you pull out and take your losses? You need to be able to stay the course.

The best way to avoid the timing risk is to systematically keep buying. Buy $100 of that ETF every month. Save more money and keep putting $100 in a month forever. "dollar-cost averaging" is the buzz-word for the strategy of systematically buying on a schedule. If the market goes down, it's not catastrophic. It's just a great buying opportunity. Your lost money might feel bad, but the great deal you're getting on new shares will offset that. And when the market recovers, it can do so spectacularly. People who bought at the bottom of the Great Recession had a great ride up and made a lot of money. If you had followed a disciplined regimen of dollar cost averaging through that recession, you automatically would have bought some spectacularly cheap and now very valuable shares of that ETF.

A plan like this also fits your low cash level, allowing you time to accumulate cash for next month and the month after that. Those ETFs can be bought for free, with no commissions to steal your money. If you can do this in an IRA or 401K even better, since even the tax man won't get a bite. Just make sure this isn't your lunch money. Anything you're investing must be kept in, for things to work. If you can't keep it there and buy more even as the market slides, the strategy can't work effectively. Don't put that money in unless you can afford to lose control of it for five years. Because you might have to wait out a tough patch for it to recover if that market slides. But recover it will. If you wait...

Finally, read the post that I wrote above yours. Much of what I said in reply to the poster before you applies in your case as well. The two of you are in the same boat-- just beginning. You have the right impulse. You're just not done with step one yet. Keep to the task and save more cash.

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