Small Investments: Strategies For Beginners To Start Today

There are many ways to start investing with a small amount of money. It's a myth that you need tens of thousands of dollars to begin investing. In fact, investing small amounts of money is easier than ever thanks to new apps, easier access, and convenient online information.

One of the most important first steps is to plan for your future by investing in your retirement. You can do this through a workplace retirement account, such as a 401(k) or pension plan, or an individual retirement account (IRA).

If you're interested in investing in the stock market, several new apps allow you to buy fractional shares of stock and ETFs, meaning you don't need a lot of money to begin investing in individual companies.

Other low-risk investment options include savings accounts, money market accounts, and certificates of deposit (CDs), which offer higher interest rates than standard savings accounts.

It's important to do your research and understand your own tolerance for risk before making any investments.

Retirement accounts

Traditional Individual Retirement Account (IRA)

IRAs are investment accounts that offer tax benefits to help you save for retirement. You can contribute up to $7,000 in 2024 and 2025 ($8,000 if you're aged 50 or older). There are two types of IRAs: traditional and Roth. With a traditional IRA, you may get a tax deduction on your contributions in the year they are made, but you'll pay taxes when you withdraw in retirement. With a Roth IRA, you don't get an immediate tax benefit, but your withdrawals in retirement are tax-free.

401(k)

A 401(k) is a workplace retirement plan where your employer matches a portion of what you save for retirement from your regular paycheck. In a traditional 401(k), contributions are made before taxes and grow tax-free until retirement age. Some employers also offer Roth 401(k)s, where contributions are made after taxes, and withdrawals in retirement are tax-free.

SEP IRA

A SEP IRA is for self-employed people or small business owners with few or no employees. Contributions are tax-deductible, and investments grow tax-deferred until retirement, when distributions are taxed as income. The contribution limit for 2024 is $69,000 ($70,000 in 2025).

SIMPLE IRA

A SIMPLE IRA is for small businesses with fewer than 100 employees. Contributions are tax-deductible, and investments grow tax-deferred until retirement. The employee contribution limit for 2024 is $16,000, with a catch-up contribution of $3,500 for those aged 50 or older.

Rollover IRA

A rollover IRA is not a type of account but a process where you transfer eligible assets from an employer-sponsored plan, such as a 401(k), into an IRA when you switch jobs.

When choosing a retirement account, consider the tax implications, account fees, minimum contributions, and your investment goals and risk tolerance. It's also important to understand the different types of investments available, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

Investment apps

SoFi Active Invest

SoFi Invest is a top investment app for beginners due to its user-friendly interface and low pricing. You can start investing with just $1, and there are no commissions for trades or recurring account fees. SoFi also offers a robo-advisor service called SoFi Automated Investing, which manages your ETFs for you. In addition, SoFi offers access to certified financial planners at no extra charge. The app has a rating of 4.8 on iOS and 3.8 on Android.

Vanguard

Vanguard is a well-known leader in investing and one of the top online brokerages. It offers a holistic approach to retirement planning, considering your entire financial situation. Vanguard provides a range of retirement account options, including SEP IRAs, 401(k) rollovers, individual 401(k)s, and SIMPLE IRAs. You also get access to various ETFs and Vanguard's All-in-One retirement funds. The app offers automated investing and tax loss harvesting features. However, the robo-advisor service is pricier.

Ally Invest

Ally Invest is a straightforward investment app that offers commission-free trading and tax-optimized investment opportunities. It provides two robo-portfolio options: the cash-enhanced portfolio and the market-focused portfolio. The app is easy to navigate and includes features like market screeners, performance charts, and stock analytics. Ally Invest also offers a self-directed trading account with no account minimum and 24/7 market access.

Betterment Investing

Betterment is a robo-advisor service that offers low-cost trading, account flexibility, and access to certified financial planners. It provides a diversified portfolio of stock and bond ETFs based on your goals, time horizon, and risk tolerance. Betterment also offers cryptocurrency portfolios, socially responsible portfolios, tax-loss harvesting, and personalized retirement plans. There is no minimum deposit requirement, but ongoing access to CFPs requires a $100,000 minimum or a $299 per session fee.

Acorns Invest

Acorns is an investment app that takes care of everything for a monthly fee of $3. It offers automatic spare change investing through transaction round-ups, retirement account savings, banking perks, and a fully automated investment plan. You can invest in a diversified portfolio of low-cost ETFs based on your risk tolerance, goals, and time horizon. Acorns also offers Core portfolios and ESG portfolios. However, there is a fee for every service, and you need to pay extra to choose individual investments.

Public Investing

Public is a socially responsible investment app that combines features from social networks with traditional brokerage features. It allows you to learn from other experts by following their posts, creating group chats, and participating in live investing events. Public offers commission-free trading on stocks and ETFs, cryptocurrency trading, and fractional share investing. It also provides educational resources like live audio events. However, it does not offer mutual funds, and it is not the best platform for day trading.

Robinhood

Robinhood is a well-known stock trading app that offers a wide range of services, including stock and options trading, as well as cryptocurrencies. It provides financial news and education, making it suitable for beginners. There is no minimum account value, and Robinhood offers free stocks and a match on individual retirement accounts for Robinhood Gold subscribers. However, it does not offer automatic tax-loss harvesting.

These investment apps offer a range of features to help beginners get started with investing. Remember to consider your investment goals, risk tolerance, and preferences when choosing an app.

Stock portfolios

There are two main ways to invest in stocks: by purchasing individual stocks or by buying a fund.

Buying Individual Stocks

Buying individual stocks can be riskier than buying a fund, as you are more exposed to stock-specific risk. If you own one stock, or even up to 20 different stocks, you are vulnerable to stock-specific risks. For example, in 2023, more than half of all US small-cap stocks lost 10% or more, despite the overall market gaining about 26% that year.

However, if you are willing to put in the time and research, there are advantages to individual stock ownership. You can express your own views on security selection or sector weights, and you can control when you take your capital gains.

Buying a Fund

For the average investor, a broadly diversified mutual fund or exchange-traded fund (ETF) is a better option. Mutual funds allow you to invest in a basket of securities, such as stocks or bonds, all at once. ETFs are essentially mutual funds that trade like stocks. They are passively managed, so they tend to have lower fees than actively managed funds.

Other Considerations

When building a stock portfolio, it's important to keep the following in mind:

• Your risk tolerance: How much are you willing to lose in the short term? Your risk tolerance will depend on your personality and financial situation.
• Your time horizon: How long will you be investing for? Generally, the more risk you can bear, the more aggressive your portfolio should be, and the longer your time horizon can be.
• Your investment goals: Are you looking for capital appreciation, growth through share price increases, or income from dividends?
• Diversification: Your portfolio should be well-diversified with holdings across multiple sectors and geographies. Remember that diversification is about owning investments that serve different roles in a portfolio, not just the number of investments you own.

Monitoring and Rebalancing Your Portfolio

Once you have built your stock portfolio, it's important to monitor and adjust it regularly. You may need to rebalance your holdings if the market has been volatile. You should also consider adjusting your investment strategy as your life circumstances change, such as getting married, becoming a parent, or nearing retirement.

Savings accounts

One of the most common types of savings accounts is the high-yield savings account, which offers better-than-average interest rates compared to traditional savings accounts. These accounts are FDIC-insured, protecting your money up to a certain amount, usually around $250,000. This means that even if the bank fails, your money is safe.

Another type of savings account is the money market account (MMA). MMAs act more like traditional savings accounts, allowing you to write checks and make withdrawals more freely than with other types of savings accounts. While MMAs may offer slightly lower interest rates than some other options, they provide greater flexibility in accessing your funds.

If you're looking for a low-risk way to invest your money, consider a certificate of deposit (CD). With a CD, you agree to leave your money in a savings account for a specific period, usually ranging from three months to five years. In return, you receive higher interest rates and a bigger return on your investment than with a standard savings account. The longer the term, the higher the interest rate you'll typically earn. However, keep in mind that withdrawing your money before the maturity date will result in a penalty.

Overall, savings accounts are a crucial part of any financial plan, offering a safe place to store your money while also providing the opportunity for modest growth through interest. They are particularly well-suited for short-term goals and emergency funds.

Investment strategies

• Robo-advisors: These services manage your investments for you using computer algorithms. Robo-advisors are a great way to get started with investing as they require very little money upfront and do most of the work for you. Examples include Wealthfront and Betterment.
• Employer-sponsored retirement plans: If your employer offers a 401(k) or similar retirement plan, consider contributing to it, especially if your company matches your contributions. This is essentially free money and a guaranteed return on your investment.
• High-yield savings accounts: While not the most exciting investment option, high-yield savings accounts are a great way to invest small amounts of money with little risk. Look for accounts with competitive interest rates.
• Fractional shares: Investing in fractional shares allows you to own a small piece of a company without having to buy a full share. This is a good option if you want to invest in a company but find the stock price too high. Examples of brokers that offer fractional shares include Robinhood and Public.com.
• Real estate crowdfunding: With crowdfunded real estate, you can invest in real estate with other investors by pooling your money together to buy property. Any profit made from selling the real estate or earning income from rents would come back to you. Examples of platforms that offer real estate crowdfunding include Fundrise and Public.com.
• Certificates of Deposit (CDs): CDs are similar to savings accounts but typically offer higher interest rates. However, you agree to leave your money in the account for a set period, and if you withdraw it early, you may have to pay a fee.
• Index funds: Index funds are like mutual funds but track a specific market index and have lower fees. They are passively managed and aim to mirror the performance of the index they track. Examples of index funds include the Schwab Total Stock Market Index (SWTSX).
• Exchange-traded funds (ETFs): ETFs are similar to index funds but are traded throughout the day, and investors buy them for a share price that can fluctuate. ETFs typically have no minimum investment and low fees.
• Pay off high-interest debt: Before investing, consider paying off any high-interest debt, such as credit cards or personal loans. This can provide a guaranteed return on your money and improve your credit score.

Frequently asked questions