Suppose you've just received a bonus at work, an inheritance, or a winning lottery ticket. Maybe you've saved up a cool $1000. What can you do with it? If you've been thinking about investing in the stock market, you can do a lot with a thousand dollars—whether you're putting a thousand a month in stocks or just one time.
Set Your Investing Goals
Before you buy any stocks or bonds or funds, you need realistic goals. Maybe you've seen ads with promises that "penny stocks can triple your investment overnight!" Don't believe it. You're not going to quit your day job from putting $1000 in the market right now, but a careful investment is likely, over time, to pay off a lot more than the 0.35% return you'll get from a bank money market account right now.
A reasonably safe and stable return rate is, on average, 8-10%. With this you can expect to turn $1000 into $2000 in seven to twelve years. That doesn't seem like a lot... but it's a start, and there are ways to do better. Investing with little money can earn you big returns, if you do it with discipline.
If you're putting in this money every month, imagine how you'll feel with $2000 invested every month in 7 years and $4000 invested every month in 15 years. Suddenly this is adding up fast!
Choose Your Level of Commitment
With a realistic goal of a 9% annual return, you have another easy question to answer. Do you want to spend a couple of hours a month looking for good stocks and reviewing your portfolio, or do you prefer to buy and hold for years and forget about it. If you're the buy and hold and ignore things type, that's great! All you need to do is find a good index fund. The S&P 500 index fund is popular because it's simple, reliable, and cheap.
$1000 in a good index fund gives you simplicity and diversification, and removes your need to concentrate on the market and your temptation to make lots of trades. Less risk? Less time? This is a great option. With an account somewhere like Vanguard, you can even set up an automatic investment every month.
A Large-Cap Stock as a First Investment
If you prefer to be a more active investor, look for an undervalued stock. Prefer a medium or large company, because they're likely to be more stable (less likely to have catastrophic financial problems) and they have more available analysis online for you to read.
You need to do your research about present value and the measurements of stock earnings which apply to the price of a stock, but if you're patient and do your homework, you can find great companies at good prices. For example, in the seven years you might expect a 10% return to double your money, an investment of $1000 in Boeing turned into $6300—but your author bought Boeing at a bargain. You won't always be able to find a bargain for every stock you want, but you can keep your eyes open.
This scenario gives you the opportunity to find better returns than an index fund. An average 15% annual return is plausible, if you're careful, which means you'd double your money every 5 years. In the 15 years it would take you to turn $1000 into $4000, you could make $8000.
Active investing in stocks themselves has two disadvanges. First, you're more likely to suffer a loss (even a temporary loss on paper) due to lack of diversification. Owning the S&P 500 means owning a little piece of 500 stocks, which gives you the ability to overlook a few bad apples. Second, you may have to wait before you find a good value and lose out on potential gains you might have achieved from the index fund strategy. A 500% gain like Boeing in 7 years doesn't come along every day.
Patience is more important with the individual stock picking strategy.
You could also use a hybrid approach to invest $500 in an index fund and $500 in an individual stock. You'll diversify and still have the opportunity to find a standout stock. Be careful, however—new investors may not immediately see one cost of this approach.
Do You Have $1000 a Month to Invest?
If you're fortunate enough to have a thousand dollars a month to invest, the same strategy can work, both in picking your investments and reducing your costs. If you go index fund only, pick a day every month when you buy. (This is a dollar-cost averaging strategy.) Rather than saving up and buying all in one lump sum, you tend over time to get better returns—even though you'll pay for 12 trades instead of one.
If you pursue the split stock and index fund strategy, you can still use the one trade a month approach. One month buy into the index fund and the next month buy into a stock. This gives you a couple of months to find a good stock at a discount, or to decide to put that money into the index fund instead until you find a great stock.
Picking Good 401(k) Investments
If you have a 401(k) account through your employer where you can invest pre-tax dollars, pick the fund with the lowest fees that's closest to the S&P 500 index. Store your money there. Most fund choices aren't great—their fees are too high—but there's usually an equivalent to the Vanguard index fund. You won't often have access to individual stocks, so make your life easy and pick something good and easy.
If you're fortunate enough to have employer matching contributions, you effectively have an investment with monthly returns of 100% of the matching amount. You're in a good situation here; you can start investing with little money and steadily watch it grow. Even $100 a month will add up over time.
How Not to Invest 1000 Dollars
Patience is a virtue for any investor. You don't have to double your money in a week to be a successful investor. (In fact, you're probably not going to double your investment overnight... or in a week... or in a month... or in a year. That's rare. You need something like $50,000 or $100,000 in the market to make $1000 a month. (Assuming a dividend rate of 2-4%, historically average for good, stable stocks worth owning.)
Every trade costs you money. Buying $1000 of an index fund will cost you between $5 and $10 with a broker (so use Vanguard directly). Selling that same index fund will cost you the same. You'll have to make back $10 or $20 just to break even (and that's not even counting what taxes you pay on any gains). Every trade you make will incur a commission, to say nothing of taxes, so if you're shifting your investments around every day or week or month, you'd better be making a hefty profit to make up for it. Every trade eats into your profits.
There's little point in trading less than $500 at a time, because at that point the fees are higher than your returns.
Remember also the difference between a stock with a low price per share and one that's currently a bargain. For example, a penny stock may seem like it has an upside but be a terrible, expensive investment at $0.50 a share while a boring blue chip like IBM may be a bargain at $500 a share.
Until that lesson has really sunk in—until you're ready and willing to do the homework to explain why a $500/share IBM purchase is better than a $1/share marijuana dispensary startup purchase—stick with index fund investing.
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