How Much Money Do You Need to Start Investing?
One of the most common questions I get when I speak with people just starting out with investing is how much money do I need to start. Luckily there are many options to effectively invest your money that are suitable for someone with $500, or someone with $5,000 or more. This post should help you choose which option is best for you based on your current financial situation.
Note that I have listed my recommended investment options from the least to the most risky.
Before you consider investing, please make sure you have at between 3-6 months worth of expenses saved in an emergency fund.
Robo Adviser
Minimum capital required: $500
If you don't have the time to research funds or companies to invest in and are short on funds, robo advisers like Wealthfront are excellent options to invest your money.
I have personally used Wealthfront and I am extremely happy with the results. Similar to an index fund, and the average returns are comparable to the overall S&P 500 index. You can expect to pay a small fee of 0.25% of your total balance managed. For example if you invest $500, your total annual fee is 0.0025 x 500 = $1.25.
Index Funds
Minimum capital required: $5,000
If you have at least $5,000 and still prefer a passive approach to investing, you can develop a diversified portfolio of low-cost index funds covering all asset classes such as small, medium and large cap domestic and international index funds, Real Estate Investment Trusts (REIT), emerging markets and government bonds.
Example Portfolio Allocation
Here is an example of a typical investment portfolio for someone in their mid twenties. Note that this is just an example. Actual portfolio allocation depends on certain factors such as your tolerance for risk.
Checkout Vanguard's low-cost index fund selection.
Individual Stocks
Minimum capital required: $5,000
A more active approach to investing is buying shares in individual companies. The average returns can be significantly higher than the two aforementioned passive approaches, but that does not come without an increase in risk.
I recommend that you have at least $5,000 before you start investing in individual stocks so that you can diversify appropriately. Also, starting with at least this much money allows you to start taking advantage of the powerful effects of compounding. Typically this approach uses either fundamental or technical analysis, sometimes both.
Individual Stock Options
Minimum capital required: $5,000
The most advanced option (no pun intended), but also the most powerful when you don't have much money to invest. Think of options as the right to buy or sell the stock at a predetermined price at some time in the future, AKA the expiration date. If you don't want to buy or sell the stock by expiration, you can just trade the contracts.
Options are an amazing way to leverage a small account to achieve 10%+ returns and generate consistent monthly income. However, you can also lose a lot of money and fast if you don't have adequate capital and manage your risk.
There are many strategies one can use. I plan on covering the basics in a separate post explaining what are options and how you can use them to make money in the stock market. If you can't wait, checkout Option Alpha for more information. Kirk Du Plessis is the man when it comes to trading options!
Cryptocurrencies
Minimum capital required: $500
Last, but definitely not least there is cryptocurrency. I'm sure at this point you have heard of Bitcoin. Maybe Ethereum and Litecoin too. At the time of me writing this post, Bitcoin is trading at ~$5,700. The potential for this technology is huge and big banks are already starting to adapt it.
The way I look at cryptocurrency is that I will invest money that I don't care about losing. I'm not going to put my life savings into a market that isn't regulated (currently I have 10% of my cash in crypto). But I want to make sure I have some stake in the game as the market grows. You can get started investing in Bitcoin, Ethereum, or Litecoin by creating an account on Coinbase.
Please don't hesitate to send me your questions. I hope this post helps when you first start thinking of where to invest your money.