by Jeff Reeves | January 8, 2014 11:00 am
The stock market is racing toward the close of its best year in a decade, with the S&P 500 up about 27% in the past 12 months.
Of course, many Americans haven’t shared in this big run for the stock market.
For some, it’s a matter of means. Median wages in the U.S. have fallen to the lowest level since 1998, and it’s hard enough for a typical family to get by, let alone worry about investing.
For others, it’s a matter of inexperience. Jumping into the market even in favorable market environments like this one still involves risk, and it’s hard to know where to start.
My advice? Start small — and start simple.
Consider that if you invest $1,000 this year, then another $1,000 each year afterwards, in 25 years you can grow that savings to a $50,000 nest egg with a modest 5% return. At a 10% return, your gains jump to $108,000.
And if you can manage to scrape together $5,000 a year and invest? You’ll wind up with $250,000 in 25 years at 5% and $540,000 at a 10% return!
That’s the power of compound interest!
So even if you think the amount you save isn’t all that large, if you save consistently and over the long term, that cash can add up in a hurry.
If you’re wondering how to get into this market and grow you’re money, here are five easy ways to invest as little as $1,000 now and start down the path to retirement success:
This simple strategy involves no extra work other than a trip to HR to adjust your allocation up $1,000 a year.
You’ll barely miss the cash if you get paid every two weeks; your investment adds up to a mere $38.50 per pay period. It’s a sneaky but effective way to get ahead!
There are secondary benefits to this approach, too:
The one drawback is that 401k funds are locked up until you’re age 59 1/2. While there are exceptions that allow you to get “hardship” withdrawals, most actions to access your 401k funds will result in high fees and taxes. So make sure this is money you can part with before you ramp up your contribution.
Also, your money only grows based on the investment options in your 401k. If you decide to park that $1,000 in a money market fund with 0.01% interest … well, it will never grow. Similarly, if you make an aggressive bet on small companies or international investments, your 401k could actually lose value if things don’t pan out.
So talk to your HR representative about the options in your plan and figure out which strategy is best for your goals.
So what if you don’t have the luxury of a 401k plan? Thankfully, you still have some fairly easy options to get started with your $1,000 investment.
Opening up an IRA or brokerage account is as simple as searching the web for “online stock brokers” and picking the best service for you — commonly the broker that offers the smallest fees, since you won’t be doing any kind of complex trading. You also can visit your local investment adviser if you prefer the brick-and-mortar approach, though that might cost a bit in fees.
Once your account is open, your best bet is to take that $1,000 and put it in what’s called an “index fund” — that is, an investment that faithfully follows a stock market index like the S&P 500 Index or the Nasdaq.
Not only are these well-diversified investments, since these funds are comprised of dozens or even hundreds of big-name stocks, but they are super cheap because you’re not paying for “active” management that involves high-priced analysts and expensive research.
Popular (and cheap) index funds come in all kinds of flavors, from the SPDR S&P 500 ETF (SPY) that tracks the S&P 500 to the iShares Russell 2000 ETF (IWM) that follows the Russell 2000 index of smaller companies, and even international indices if you want exotic investments.
Oh, and like a 401k contribution, there also are tax benefits to contributions depending on your income.
It’s always best to start with a strong foundation for investing with diversified index funds. But if you know enough about the stock market to be dangerous, or if you already have a diversified 401k and are looking to supplement your retirement funds with something else, consider buying stocks directly in that brokerage account we just talked about.
There’s more risk in buying individual stocks, but there’s also the shot at greater rewards — and $1,000 is enough to tap into 99% of the investment options on Wall Street.
Now, the vast majority of brokerage accounts are going to charge you for every transaction … so buying a lot of stocks or trading often can eat into profits. Consider that if you pay $7.50 each transaction, buying and selling 10 stocks in a year will cost you $150 — or 15% of your entire $1,000 investment!
You’d need to pick significant winners each time just to break even … so a better plan is to pick a quality “set it and forget it” stock that you can rely on for long-term growth and a decent payout via dividends. These are most commonly large companies with stable operations, such as Coca-Cola (KO) or Johnson & Johnson (JNJ).
No matter which stock you pick, it should have a long-term flavor and a decent dividend that allows you to share in the profits of your favorite stock. For instance, Coca-Cola currently pays back 2.8% of what you invest each year in dividends alone! That means even if your stock itself goes nowhere, you’re still getting some kind of return on your investment over time.
This is a great choice for those with student loans, a mortgage or any long-term borrowing under your belt.
Paying down even a small amount of your loan early can drastically reduce what you’ll be paying down the road. And in the case of credit card debts and other short-term loans with higher rates, the payoff is even bigger and more immediate.
That’s to say nothing of the benefits you may reap through an increased credit score — and the added bonus of one less bill to pay each month.
If you had a hard time scraping together $1,000 because of your debt load, it might not be very satisfying to simply use that right away to pay more bills … but remember that the lower your bills next month, the more money goes back into your pocket.
And if you’re smart, that extra cash will pay down even more debt — or if your debt is manageable, then that cash will give you the platform to start investing.
Sometimes the best investment you can make is in yourself, whether it be spending to start a new business or paying for job retraining.
This is a touchy-feely notion, and one that might be very risky to Americans who are simply concerned with getting by and keeping their job after the Great Recession. But the bottom line is that one of the most powerful economic tools you have at your disposal is your ability to work — particularly during your peak earnings years.
If you have a knack for writing, just a few hundred bucks can get you a domain name and several months of server space for a website while you try to turn that talent into a business. If you have a knack for home improvement, take out a few ads and buy some tools, then see what happens. If you want to do wedding photography, buy $1,000 worth of gear.
The downside, of course, is that these avenues are most profitable if you don’t consider your time to be very valuable, so folks with busy schedules may find them downright impossible. And, of course, there’s the risk that you may fail.
But aside from the satisfaction of being your own boss — even on a part-time or occasional basis — you might find this is the most profitable long-term investment you’ve ever made. That new camera could result in tens of thousands of dollars from photo gigs over the next few years if things go well!
If you build a successful business from scratch, nobody is there standing between you and the profits. And as the economy begins to improve broadly, now may be the perfect time to take a chance and invest in yourself.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not own a position in any of the stocks named here. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.
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