Learning how to invest in is no easy task, particularly in 2016. After the Federal Reserve increased interest rates for the first time since 2006, after China’s economy showed serious signs of a slowdown and amid a huge fight for the White House and continued infighting in the House of Representatives … well, it’s hard to know how to invest in stocks right now even if you’re a seasoned pro.
Investing for beginners is never an easy task, and particularly in 2016, there are some specific challenges. But it’s helpful to know that when you begin exploring how to invest, simpler is frequently better.
That’s particularly true if you’re beginning investing with a small sum of only $1,000 or so.
While $1,000 doesn’t seem small to most American families, the realities of investing in stocks — or more particularly, the fees and taxes involved with investing in stocks — make it difficult to divide up that sum into multiple strategies. Thus, it’s easier to stay focused on one goal as you figure out how to invest in stocks, rather than try to do too much with too little.
If you want to learn how to start investing, you have to start somewhere. And think of it this way — if you get paid every two weeks, you can start investing with $1,000 simply by saving about $39 each paycheck across the coming year.
If you’re committed to a comfortable retirement, you can’t afford NOT to invest … and here are five simple ways to begin investing with as little as $1,000.
How to Start Investing — Increase Your 401k Contribution
One of the best options at your disposal is an employer-sponsored 401k retirement plan. That’s because these vehicles cut out a lot of the behavioral hurdles to investing and allow you to grow your cash without much guesswork.
For starters, a 401k makes sure you “pay yourself first” with money that’s deducted before you even see your final pay stub. That prevents you from making excuses not to save each month.
Also, many employers offer a 401k match for employees who are looking to start investing in stocks. Sometimes a company will match your contribution dollar-for-dollar and other times it’s only half of the amount you contribute. But regardless, this is basically free money — and a reward for investing and saving, which you should be doing anyway.
Another plus is that thanks to the limited options in 401k plans, a lot of the guesswork has been taken out of the equation for you. If you don’t have that much cash to invest, keeping it simple with just one or two diversified stock funds is the best plan anyway.
How to Start Investing — Buy an ETF
If you don’t have access to a 401(k), or if you’re looking to increase the amount of cash you have invested, exchange-traded funds are a great option.
ETFs are vehicles designed much like mutual funds. They are diversified baskets of stocks, bonds or both that allow even smaller investors to play a wide swath of the market even with a rather modest sum.
Not only does this allow you to spread your risk around and avoid gambling on an individual company that could boom or go bankrupt, you also will be paying much less fees.
Take an “index fund” like the SPDR S&P 500 ETF Trust (SPY). This fund is benchmarked to the S&P 500 index, which contains the 500 largest and most prominent U.S.-based stocks, and has a net expense ratio of just under 0.1% annually. In other words, this ETF costs you less than $1 a year in fees on your $1,000 investment — quite a bargain for the peace of mind it offers you by spreading your cash around 500 different stocks like Apple Inc. (AAPL), Exxon Mobil Corporation (XOM), General Electric Company (GE) and other giants of business.
Exchange-traded funds come in all shapes and sizes if you want to get sophisticated, varying based on geography or on investment style. But most investors should probably stick to a simple index fund like the SPY, which tracks one of the well-known stock market indexes pretty faithfully.
How to Start Investing — Buy a Bond
If the prospect of stock market investing is too risky for you given the volatility of recent years, you can begin investing by getting into bonds instead.
Bonds are effectively debt — but instead of you being the borrower, you are actually lumping your “investment” together with a bunch of other people to become the lender.
As such, you are given interest payments regularly as a return on that investment.
One of the safest investments in the world is to loan money to the U.S. Treasury by buying government bonds. You can do this easily by registering online at Treasury Direct — the online portal of the Treasury that allows individuals to participate in bond sales of as little as $100.
The low-risk nature of U.S. Treasury bonds means that there is also a low rate of return — but considering that most bank savings accounts deliver pennies (or less) in interest each year, the prospect of getting a few bucks back instead is a marked upgrade on your $1,000 investment.
How to Start Investing — Pay Off Debt
Speaking of debt and interest … investing for beginners often involves thinking about growth, but you shouldn’t overlook the power of liberating yourself from personal debt.
Using $1,000 to pay off extra principle on your debts is a great choice for someone with student loans, a mortgage or anyone with high-interest-rate borrowing under your belt — particularly if the rate of interest on those debts is higher than the rate of return you’d be able to get in either the stock market or the bond market.
Think of it this way: The interest you prevent on that 6% car loan by paying it off early may actually be a better “return on investment” than the profits on any bond or stock fund.
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.
But the trick is to keep in mind that most debt involves amortization — meaning your payments consist almost wholly of interest to start your repayment, but become almost wholly principal by the end of your repayment schedule. If you’re 50 months into a 60 month loan, then, this kind of tactic may not help much.
However, if you can pay just a bit more each month at the beginning of your loan then you can see a big return on that investment – 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 when the debt is zeroed out.
How to Start Investing — Invest in Yourself
In the words of financial journalist and web entrepreneur James Altucher, his best investment was “in either myself or people I knew very well who were building companies.”
If you have a knack for writing, just a few hundred bucks can get you a domain name and server space for a website.
If you have a knack for home improvement, buy some tools, take out a few ads and see what happens.
Remember, stock market investing for beginners is fraught with risk — and many folks just getting started simply don’t have the knowledge to make a go of it. So why not put your investment towards something that you’re an expert in and have a passion for?
The downside, of course, is that this equation is most profitable if you consider your time isn’t worth much, and those folks with a busy schedule may find the idea downright impossible.
But aside from the satisfaction of being your own boss — even on a part-time or occasional basis — you may find this is the most profitable long-term investment you’ve ever made.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
