How to Invest Now With Little Money to Start

Let’s assume you have no more credit card debts; you make regular student loan payments and you’ve already got your emergency fund in place.

In fact, you’ve been ready to invest for the last six months or so, but you’ve hesitated – perhaps wisely – because you know the market’s already gone up 60% since March of 2009. You’ve also been hearing talk of a double-dip recession and you’re worried about the escalating federal debts.

But you’re supposed to get started investing as soon as possible, right? Time is on your side.  And you know you shouldn’t market time, so what’s the matter with just jumping in?  Aunt Sally’s doing well with her PowerShares China fund – maybe you should just put some money in that and ride it out while you figure out what you should really be doing with you money?

There will always be mixed messages in market news.  This is how markets function – one party thinks it’s the right time to sell a stock, while another party thinks it’s the right time to buy.  The important thing is to focus on what you need and what value you can get for your money today.

With all those caveats out of the way, here are my suggestions for anyone just looking for a smart, sensible way to get started in investing now. We will assume that you are starting with $10,000 to invest. If your capital is different, the advice should still hold.

Starting Investing With $10,000

$10,000 can be a lot of money.  Since some Canadian mining stocks (to take one example) rose 100, 200 and 300% (and more) off the March 2009 lows, you can imagine what $10,000 could do if invested in the right vehicles.  I’m not suggesting you look at Canadian mining stocks, however.  That story’s already finished.

What you need to do is figure out

1. asset allocation
2. the sectors to invest in and
3. the vehicles for investing in them

This means figuring out what portion of your portfolio should be in fixed income vs. growth, whether you will invest in the entire market or just key sectors like healthcare, and whether you will use mutual funds, ETFs, or buy shares directly through a broker.

For simplicity’s sake, and for just getting started, I’d recommend that, for now, you just limit your portfolio to ETFs.

Protect your portfolio

You want some portion of your portfolio in investments that are not very volatile and have little downside risk.  Usually this is bonds, but recently there is growing hesitation over bonds since their rally might also be done (it’s called a “crowded trade”).  Investments such as Money Markets, GICs or CDs (Certificates of Deposit) aren’t helpful right now either, since they pay next to no interest.

I’d take your age, turn it into a percentage figure, and then use that as a guideline for what % of your $10k to put in this category.  It’s not a hard and fast rule, so if you have reason to believe you’re comfortable taking on a bit more risk, you can lower the amount.  So if you’re 30 years old, you might think about allocating anywhere from 25-35% of your portfolio here.

My suggestions right now: low-beta (i.e., low volatility) healthcare or pharmaceutical stocks like Johnson & Johnson, that pay good, rising dividends.  You might also still consider a corporate bond fund, since these pay higher yields.  Don’t put all your money in a “high-yield” bond fund, however, without knowing what it’s made of – it could be largely “junk” bonds (bonds with low credit ratings), or it could include quite a few decent corporate bonds, too.

If you are comfortable with and can understand how derivatives work, online options trading can also provide a great way to hedge against risk of loss or volatility. Just remember that derivatives trading is fraught with risk and you know what you are doing.

Buy an ETF focusing on “income” or “fixed income.”  It should pay you distributions at least quarterly.  Make sure the MER is low, preferably close to 0.5% or lower.

Allocate about $2500 to this portion of your portfolio.

Domestic Growth

Because you know your own country best, you have an advantage over international investors because you are familiar with many of the companies and you might have access to better research about them.  It’s also easier to buy companies’ stock listed on domestic exchanges.

Depending on where you live, I’d advise you to have a bit less or more in this category than usual.  If you’re in the U.S., you should definitely (in my opinion) be “underweight” (i.e. own much less than usual) American equities.  The economic fundamentals just aren’t supporting U.S. growth anytime soon.  That said, there are several U.S. companies that do most of their business abroad (think IBM and Coke) and these could be good choices.

If you live in Brazil or Vietnam, however, you can afford to be heavy on your own market because your own domestic economy is experiencing good growth and will be for some time to come.

Buy an ETF that tracks the main index of your country.  In Canada, this is the S&P/TSX 60 – so you want the iShares ETF that replicates this index (XIU).

Depending on where you live, I’d allocate about $2000-$4000 to this portion of your portfolio.

International Growth

Right now foreign equities should be the bulk of your portfolio.  Pick a mix (say, 50-50) of companies with a history of paying out good dividends and increasing them on a frequent basis and combine these with a handful of companies poised for heavy growth – some tech stocks, telecommunications stocks, health care stocks and pharmaceuticals (all industries that are expected to do well over the next year).

Because you’ll be less familiar with international stocks, I’d buy them through ETFs which help diversify your growth and currency risk.  Visit the websites of iShares, Vanguard, Barclay’s and PowerShares to get a sense of the ETFs available.  Check their expense ratios and try to get the cheapest ones possible for the ETF class you’re interested in.

Buy one ETF that tracks the “total world index” (Vanguard has one of these), or buy two ETFs – one for international dividends, one for pure international growth.

I’d allocate about $5000, or around 50% of your portfolio here. For Americans, I’d probably go with about $6000.

Everyone Has To Start Somewhere

You won’t get investing “right” your first time around.  It takes time to learn everything and you need to allow yourself chances to make mistakes.  But I wouldn’t wait on the sidelines until you think you “know enough” to jump in.  Put some money in and just start learning.  The options mentioned here are all conservative choices that will do you well if you keep a few things in mind:

1. Buy and hold – the quickest way to start losing money is to start timing and trading.  Don’t do this if you’re a beginner.
2. Keep fees low – go with ETFs that have very low Expense Ratios, like 0.3% or 0.5%
3. Buy passive ETFs only – don’t buy “actively managed” ETFs, don’t buy leveraged ETFs.  The original ETFs were simple and just tracked indexes.  This is what you want to do, too.

Another option, for someone who really just wants to cautiously dip their toes in the water, would be to pick a stock you know well and think should do well – and just open up a brokerage account and buy a few shares of it.  This allows you to learn about the process of using a brokerage and tracking your stocks/ETFs without laying a lot of money on the table yet.  You can get comfortable with the feeling of having some money in the markets without yet putting it all in.

Once you’re comfortable that you know what you need to know, then invest your $10,000 in two or three stages.  For example, on February 1 you might put $5000 into two ETFs.  On March 1, you might put in the other $5000.  This will also allow you to benefit (or take advantage of) from changes in the direction of the market (if the market drops in February, you can buy it cheaper in March; if the market rises in February, at least you got half of your portfolio in at the lower price).

If you have any questions about getting started, feel free to ask me here or email me through my blog.  There are some other options for you, too.  I look forward to hearing from you!  I am not a registered investment advisor so make sure you consult your financial advisor and conduct your own diligence.