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How to Invest in Small Amounts as a Beginner

Last updated by on 17 Comments

Last week I made a case for why you need to start investing, even if you have a fear of investing in small amounts because you do not think you have enough savings to do so.

The other big fear I mentioned, but did not dive in to, involved the “how” of investing.

Before going in to the how, a few disclaimers, as chirpers will chirp:

  • the ideal investment strategy for beginning investors can easily apply to both retirement accounts (401K’s, IRA’s) and non-retirement accounts.
  • before investing in a non-retirement account, you should definitely make sure to capture 100% of your employer’s 401K match. This is free money, and probably better than any return you will be able to achieve on your own.
  • investing in the market is not for everyone. You must have patience and a long-term outlook to succeed.
  • the strategy I’m about to highlight is how I personally would start from scratch, if I were to do so. It is not a recommendation I think everyone should follow as I am not an investment adviser and the market could absolutely tank in the next year, so you should definitely study up from other sources before you start investing – and even then you could get your ass handed to you. There is always risk in investing, as there is in driving a car, eating a hot dog, or blowing your nose.

let’s continue…

The Beginning Investor Dilemmas

Beginners who have smaller savings levels usually have one, or a combination of the following concerns:

a. “I don’t have enough to start an account”

b. “it logistically doesn’t make sense with the trading fees on smaller contribution levels”

or

c. “I don’t know what to invest in”

Investing outside of a 401K on your own is not only easier than you think, but you probably do have enough to start an account if you are not in debt and there are ways to avoid excessive trading fees on smaller contribution levels.

If you’re doing it the right way, figuring out what to invest in is easy as well.

I’ll address each of these concerns so that you can feel a lot more comfortable about getting out there and investing.

“I Don’t have Enough Savings to Start an Investment Account”

In my guide to starting an online broker account, I highlighted the minimum opening deposit accounts at each of the major online brokers and any account fees. They are as follows:

  • how to invest for beginnersTradeKing: $0 minimum to open. Inactive clients who have not traded for an entire year and have a combined household account value of less than $2,500 will incur the annual inactivity fee of $50.
  • Scottrade: $500 to open
  • Schwab: $1,000 to open
  • Vanguard: $0 to open. Vanguard charges a $20 account fee if you have less than $50,000 in assets
  • OptionsHouse: $1,000 to open
  • Betterment: $0 to open

Before you go an sign up for one, read the next section.

As you can see, at most, you’d need a $1,000 deposit to start an investment account, and $0 is enough at many investment brokers.

“It Logistically Doesn’t Make Sense to Invest with the Trading Fees on Smaller Contribution Levels”

This concern makes a lot of sense if you are thinking about trading in and out of investments or buying mutual or index funds, as most beginning investors do. Yes, if you are contributing $50 a month and have a trading fee of $4.95, that’s an obscene fee rate of almost 10% of your investment. Do this every time you add additional funds, and you are on the fast track to the poor house.

Even buying into a mutual fund can bring excessive fees at smaller contribution levels. Most require minimum deposits of $1,000 to $3,000 and higher, and then charge a buy-in fee of $10-$20 or more.

This is why I’m a big fan of passive index investing via ETF’s. Today, there are a number of discount brokers with free ETF trading, including: Vanguard, Schwab, and Scottrade. Any time you buy or sell one of the specified ETF’s with these brokers, you don’t pay a trading fee. This means that if you want to diversify in the beginning and/or contribute small amounts every month to dollar cost average, you can do so, without excessive trading fees eating in to your returns.

Betterment is another broker that does things a bit different and doesn’t charge trading fees. They simply choose and invest in very low cost index funds (from Vanguard and iShares) and charge customers a percentage of total assets (varies from 0.15 to 0.35, based on your asset total) on top of the Vanguard and iShares ETF’s they include in their portfolio.

Any one of these 4 discount brokers is a good place to start for those with small contribution levels who don’t want to be beaten down by excessive trading fees.

One of the greatest investing minds of all time, Warren Buffet, has said, “if you buy index funds, over time, that’s probably the best investment most people can make.”

Index funds and ETF’s are virtually interchangeable because they both follow the same indexes – I’ve highlighted the differences between ETF’s and index funds in the past. For a beginning investor, all you really need to worry about is price. I generally think ETF’s are better for beginners because they allow them to start out with lower amounts, there is no fee to buy them (if you are following the free ETF trading strategy I previously highlighted in the free ETF trading article), and their management fees are usually less than index funds (but you should compare before buying).

“I Don’t Know what to Invest in”

This is another reason why I am a big fan of passive index investing, particularly when it pertains to beginning investors.

With passive investing, you choose an index fund or ETF that has assets in stocks/bonds that are part of a certain index. You choose the ETF or fund, but you don’t choose individual stocks or bonds. Doing the latter is a losing game for most institutional investors, and certainly most beginning investors.

And with ETF’s, you are automatically diversified as indexes follow dozens, sometimes hundreds, and even thousands of individual stocks and/or bonds. Buy an ETF and you are owning a small piece of all of them. That’s diversification of risk.

ETF’s that follow broad indexes like the S&P 500, international market indices, the total world market, and real estate are a good starting point. I’m not going to give you specific ETF’s – you’ll have to do a little bit of work on your own.

Before investing, do you homework. Check out the books The Bogleheads’ Guide to Investing (from Vanguard founder John Bogle), Investing For Dummies, and whatever else you can get your hands on from the library. I’m also a big fan of Kiplinger Magazine.

How to Invest in Small Amounts Discussion:

  • If you’re a beginning investor or have a small amount to invest, what has your investment strategy been?
  • What is your favorite online broker and why?
  • What ETF’s, index funds, or other investments do you own?

About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


17 Comments »
  • Ron Ablang says:

    I’d like to hear about other’s favorite online brokers and especially if one has done research about which group has the best overall performances.

    I’ve heard Vanguard being mentioned by several as the best (performance-wise) but I don’t know how to verify that.

    • G.E. Miller says:

      When it comes down to ETF’s, you can compare past performance and expense ratios very easily on Google Finance by putting in the ticker symbol for the ETF’s that directly compete (i.e. iShares S&P 500 ETF vs. Vanguards S&P 500 ETF).

      I haven’t seen a company vs. company general comparison, but that is what I’d recommend.

    • Nick Hovious says:

      I have used Vanguard since 2007 and I believe they are among the best. They have extraordinarily low fees in comparison to their competitors. For a novice investor who plans on investing in index funds (Mutual or ETF) lows fees are especially important. Since all index funds are created to follow a given market they should have similar returns so the fees each charges can often make the difference in overall return.

  • MoneySmartGuides says:

    Good job pointing out all of the ways someone can start investing will little money. I use Schwab for my investing. If you buy Schwab mutual funds (there are a few good ones), you can start off with just $100 and then the minimum for any additional purchase is only $1. Super easy for anyone to slowly start investing with little money.

  • Charles says:

    Vanguard’s $20 fee is waived if you agree to receive electronic statements.

    In my opinion, Vanguard mutual funds are some of the best since they have some of the lowest fees available.

    • Natalie H says:

      Wow, I didn’t know that! I chose to avoid Vanguard because of the fee. For the small amount I have it equated to about an additional 1% fee. Looks like I will be switching to Vanguard soon.

      I chose Scottrade, and they are fine, but nothing great. They do have excellent customer service, no fee to close an account, and a large selection of free to trade mutual funds and ETFs. What I didn’t like is that all their research info makes it very difficult to find long term information, if it is available at all. Everything seems geared toward day traders. I understand that is where they make their profits, but it was frustrating that the info wasn’t more comprehensive. I chose them because of the low fees and highly rated research tools. Since the tools aren’t all they are cracked up to be, I’m looking to switch.

    • Natalie H says:

      I highly recommend reading _The Four Pillars of Investing_ by William Bernstein before beginning to invest. I found it at my local library.

  • The general rule of thumb is to not allow your trading costs to exceed 2% of your total transaction. For investors with little to invest don’t discount the power of compounding or how investing a few hundred dollars now can grow to tens or even hundreds of thousands over a couple decades.

  • Evan says:

    Your advice on ETF’s for the everyday investor is good. There are literally thousands to choose from, diversify among those options, think outside the S&P 500 and take risk for those with long time horizons.

    As out of touch as he is, Buffet is correct to say ‘buy when others are fearful’. As in all your stocks are off by 50%, you take the 25% you have in cash, put on your big boy pants and buy.

  • Joe says:

    So would you have any advice as to layer this type of investment within a general investment account vs. Roth IRA account? Are there any special caveats that we should be concerned with?

    Great information, thanks!

  • Marvin @ San Jose Options says:

    One thing every new (and even old) investor needs to know is that before you invest (in anything really), you need to take care of all of your bad debt first. It’s counter productive.

    We can get a little more technical and talk about “after-tax rate of the debt” vs “expected after-tax rate of return of the investment”. But I’d have a blog post within a blog post. Hehe.

  • Drew says:

    It’s great to start off with small amounts if you have reservations about investing. Then once you’ve made the leap things can take off from there. Also people say not to check your portfolio every day because the ups and downs will frighten you. This is exactly the training you need to undergo while you’re only contributing small amounts. Soon you’ll be used the fluctuations and be more likely to keep your cool a few years down the line when there’s more at stake.

  • Chasa says:

    Not related to this post, specifically, but I have a question: Could you write a post on the difference between a dividend and a capital gains disbursement? Are they taxed differently? Why would I get a $4 dollar dividend for the quarter then a $75 capital gains disbursement in the same week? Also, I’ve gotten long and short term capital gains disbursments – what’s the difference with these tax-wise?

  • Aram Durphy says:

    ETFs are always a good idea when starting out. Mutual fund fees will eat at your annual return, and they often won’t do any better than similar ETFs. My big recommendation: when you’re investing in the stock market, remember it’s for the long term. Work on your discipline when things get volatile. Keep your hand off the sell button when the market drops and look to add more through dollar cost averaging (a little every month). The S&P 500 averages about 8% per year with dividends, but the only way to get that is to hold on as the annual return for individual years bounces far below or above 8%.

  • Gail says:

    G.E. thank you so much for writing this blog. I am 50-something and never invested before. Being in a financially precarious situation regarding the future, I have been looking to investing to maximize what I do have.

    After reading your advice on investing for the past several months,I finally feel ready to start investing. Without your introduction to investing and related articles, I would have made some terrible mistakes or never summoned the courage to venture out on my own. I started out with an IRA with a target date of 2025 through Vanguard. Next I will purchase some Vanguard Index Funds and Bonds. Ally Bank has a great money market rate of .95% right now that I will use as a holding account for my next investments.

    I agree with another commentor that the book, The Bogleheads’ Guide to Investing is also most helpful and compliments the information in your blogs.

    Keep writing, your experience and insights are so much appreciated!

  • Mike says:

    Also transaction fees are waived for some ETFs if your account is with the brokerage who owns the ETF. For example, for a Vanguard account holder the commission on buying any Vanguard ETF is $0. You can buy 1 share, 10 shares or 1000 shares, it doesn’t matter.

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