Small Investments, Big Returns: Strategies To Attract Investors With Modest Capital

Investing $500 can be a great way to start building wealth. While it may not seem like a lot of money, it is a good starting point for those who are new to investing. The key to making your money grow is to put it in an investment that suits your risk tolerance and goals and add to it regularly.

There are several options for investing $500, including investing in the stock market, real estate crowdfunding, opening a Roth IRA, high-yield savings accounts, or high-yield certificates of deposit. You can also consider investing in online businesses, income accelerators, or hiring a robo-advisor.

It is important to remember that investing comes with risks, and there is no guarantee of returns. However, with a well-thought-out strategy and a long-term perspective, investing $500 can be a great way to begin building your financial future.

Choose a hands-on or hands-off approach

If you want to be hands-on with your $500 investment, you can choose to invest in the stock market. You can use a platform like M1 Finance to place your money into investment "pies" that are expertly curated and made up of fractional shares of stocks, helping you diversify your portfolio. You can also set up automated investments to add to your portfolio over time.

However, you may feel intimidated by individual stocks, in which case you can opt for a hands-off approach by using a robo-advisor. Robo-advisors will build an investment portfolio for you based on your goals, investment time horizon, and risk tolerance. You'll pay a management fee for this service, typically a percentage of the assets under management.

If you want to be more hands-on but need some guidance, you can use a robo-advisor like Betterment, which offers personalized help with choosing investments and additional features like tax loss harvesting and portfolio rebalancing.

Alternatively, you can take a more hands-off approach by investing in a high-yield savings account or high-yield certificate of deposit (CD). These options offer a guaranteed return while keeping your cash accessible, and your funds are protected by FDIC insurance.

• Time and expertise: If you have the time and expertise to research and select investments, a hands-on approach may be suitable. If you prefer to leave the investment decisions to experts, a hands-off approach with a robo-advisor may be preferable.
• Risk tolerance: Consider your risk tolerance and whether you are comfortable with the potential risks and returns associated with different investment options.
• Fees: Hands-on investing may involve higher transaction fees, while robo-advisors typically charge a management fee based on a percentage of your account balance.
• Level of involvement: Decide how involved you want to be in the day-to-day management of your investments. A hands-off approach with a robo-advisor can automate your investments and portfolio rebalancing.

Remember, the best approach depends on your financial goals, risk tolerance, and personal preferences.

Diversify with ETFs

Exchange-traded funds (ETFs) are a great way to diversify your portfolio and can be a straightforward yet flexible investment solution. ETFs are baskets of individual securities, much like mutual funds, but with two key differences. Firstly, ETFs are traded on exchanges like stocks, while mutual fund transactions only occur at the end of the trading day. Secondly, expense ratios tend to be lower with ETFs.

ETFs are relatively inexpensive and offer higher liquidity and transparency as they trade throughout the day like stocks. They are also passively managed funds that simply reflect the contents of an underlying index or other benchmarks. This means their performance matches that of the benchmark as closely as possible.

There are many ETF options to choose from, and the right combination of ETFs can produce a balanced, diversified portfolio. Here are some steps to help you get started:

Determine the Right Allocation:

Consider your objectives, return and risk expectations, time horizon, distribution needs, tax and legal situation, personal situation, and how this portfolio fits within your overall investment strategy. All these factors will help determine your asset allocation. If you are unsure, consider seeking advice from a financial advisor.

Implement Your Strategy:

Select an ETF for each sector or index you want exposure to. Analyze the available funds and determine which ones will best meet your allocation targets. It is generally not prudent to place all your buy orders in one day. Instead, consider phasing in your purchases over a period of three to six months.

Monitor and Assess:

At least once a year, check the performance of your portfolio and compare each ETF's performance to that of its benchmark index. Any difference, known as tracking error, should be low. If the difference is significant, you may need to replace that fund with one that will stay truer to its stated style. It is recommended to rebalance your portfolio once a quarter or annually, rather than overtrading.

When building an all-ETF portfolio, ensure that multiple asset classes are included to create diversification. Here are some areas to consider:

• Sector ETFs: Focus on specific fields, such as financials or healthcare. Choose ETFs from different sectors that are largely uncorrelated to achieve true diversification.
• International ETFs: These may focus on emerging markets, developed markets, or both. They can track an index investing in a single country or an entire region.
• Commodity ETFs: These allow you to track a broad range of commodities, from gold to cotton to corn. Unless you have expert knowledge in a particular commodity, a broad commodity ETF is generally a good choice.

Robo-advisors, which are becoming increasingly popular, can also build all-ETF portfolios for their users.

Plan to stay invested for at least five years

Staying invested for at least five years is a great way to build wealth over time and achieve your financial goals. Here are some reasons why staying invested for the long term is a wise strategy:

Long-Term Growth Potential

Long-term investing allows your money to compound and grow over time. Historically, the stock market has delivered strong returns over extended periods, and staying invested through market ups and downs can lead to significant gains. Even during volatile periods, staying invested can be beneficial, as markets tend to recover over time.

Compounding Returns

Compounding plays a crucial role in long-term investing. When you reinvest your returns instead of withdrawing them, your investments generate returns on top of returns, leading to exponential growth. This effect becomes more pronounced the longer you stay invested.

Riding Out Market Volatility

Market volatility is a normal part of investing, and it's essential to remember that short-term fluctuations are common. By staying invested for five years or more, you can ride out these fluctuations and focus on the long-term growth potential.

Benefit from Dollar-Cost Averaging

Dollar-cost averaging is a strategy where you invest a fixed amount at regular intervals, such as monthly or quarterly. By doing this, you purchase more shares when prices are low and fewer when prices are high. Over time, this strategy can lower your average cost per share and boost your overall returns.

Tax Advantages

Long-term investing can offer tax advantages, especially in retirement accounts like 401(k)s and IRAs. These accounts allow your investments to grow tax-free or tax-deferred, enhancing your overall returns. Additionally, some investments, such as dividend stocks or mutual funds, may provide tax benefits.

Disciplined Investing Approach

Committing to a five-year investment plan encourages a disciplined approach to saving and investing. You are more likely to stick to your investment strategy and avoid making impulsive decisions based on short-term market movements.

Achieving Financial Goals

A five-year investment horizon provides a reasonable timeframe to work towards both short-term and medium-term financial goals. Whether you're saving for a down payment on a house, your child's education, or retirement, a well-structured five-year plan can help you achieve these goals.

Flexibility and Diversification

Long-term investing often offers more flexibility, allowing you to adjust your investment strategy as your financial situation and goals evolve. You can also take advantage of diversification by allocating your investments across different asset classes, reducing the impact of market fluctuations on your portfolio.

Inflation Protection

Holding cash may not be the best strategy during periods of high inflation. By staying invested in a diversified portfolio, you can potentially protect your purchasing power and maintain the buying power of your investments over the long term.

Peace of Mind

Finally, staying invested for the long term can provide peace of mind. Knowing that your investments are working hard for you and that you have a well-thought-out financial plan can reduce anxiety and help you make more rational decisions.

Consider a high-yield savings account

A high-yield savings account is a great option to consider if you're looking to invest $500. These accounts are a type of federally insured savings product that earns rates that are much better than the national average. They can earn around 5%, compared to the national average rate of 0.45%.

High-yield savings accounts are ideal places to park your money when you want your savings to grow. They are a safe option, as they are federally insured up to $250,000 per depositor, and many non-bank providers partner with banks for insurance. Accounts at banks are backed by the Federal Deposit Insurance Corp. (FDIC), while credit union accounts are backed by the National Credit Union Administration (NCUA).

You can find great rates at high-yield savings accounts offered by banks as well as credit unions. The most competitive offers tend to come from online banks and credit unions, as they have lower overhead than traditional brick-and-mortar banks, which allows them to offer higher rates.

When choosing a high-yield savings account, it makes sense to start with the interest rate, but don't stop there. There are a few other important variables that distinguish these accounts from one another. For instance, if you want to bank with an institution that lets you walk in and ask questions, trying to do all your money management via an app on your phone might be a frustrating experience.

• Look for a good interest rate: The annual percentage yield (APY) that you can earn from the most competitive online savings accounts has climbed sharply over the past year or so. Today, you can find a handful of accounts in the 5% range, and there are dozens with APYs of 4% or higher.
• Look for convenience: While interest rates are important, you don't want to look at APYs in a vacuum. Unlike fixed-rate products such as CDs, savings accounts' interest rates are variable, so make sure you select a bank you'll be happy with even if you're earning a lower rate of return in the future.
• Make sure it has FDIC insurance: The collapses of several banks in March 2023 highlighted how important it is to make sure that the bank you entrust with your savings is a member of the FDIC, the government agency tasked with protecting customer deposits if a bank fails. Credit unions, meanwhile, should belong to the NCUA, the government agency that oversees credit unions and offers equivalent deposit protection to customers.
• My Banking Direct, 5.45% APY
• UFB Direct, 5.25% APY
• Bread Savings, 5.15% APY
• Bask Bank, 5.10% APY
• Popular Direct, 5.05% APY
• CIBC U.S., 5.01% APY
• Salem Five Direct, 5.01% APY
• LendingClub, 5.00% APY
• Varo, 3.00% APY (5.00% if certain requirements are met)

Invest in dividend stocks

Dividend stocks can be a great choice for investors looking for passive income. Dividend stocks are shares of companies that regularly pay investors a portion of the company's earnings. Some pay dividends annually, semi-annually or quarterly, while others are monthly dividend stocks. The average dividend yield of some of the top dividend stocks is 12.69%.

When investing $500, it is important to remember that you don't have to spend it all on one stock. You can buy stocks of smaller companies for as little as $1 or $5 per share, allowing you to develop a diverse portfolio.

• Find a dividend-paying stock: You can look for stocks that pay dividends on financial sites or your online broker's website.
• Evaluate the stock: Compare the dividend yields among its peers. A much higher dividend yield could be a red flag and warrants further research. Also, look at the stock's payout ratio, which tells you how much of the company's income goes towards dividends.
• Decide how much stock you want to buy: Determine how much of your portfolio goes into each stock, keeping in mind that you need diversification if you're buying individual stocks.
• International Seaways Inc (INSW)
• Pennymac Mortgage Investment Trust (PMT)
• Franklin BSP Realty Trust Inc. (FBRT)
• Angel Oak Mortgage REIT Inc (AOMR)
• Seven Hills Realty Trust (SEVN)
• AG Mortgage Investment Trust Inc (MITT)
• CVR Energy Inc (CVI)

Investing in dividend stocks can be a great way to bring in investment for $500.

Frequently asked questions