How to Buy Your First Stock with $2,000


Lost Cave1

The first thing you should do when starting a new job is to open a 401K account if you can.  (If not, there are probably other, similar options such as a 403b account.)  With the 401k, because this is our retirement savings, we can’t afford to take the kind of risks that we can take with our regular investment account.  Also, most 401k accounts are limited in the investment choices, and some funds restrict trading, so they really aren’t suited for stock picking and rapid growth anyway.

With a 401k, the goal is to grow funds while minimizing risk as much as possible while still earning enough to outpace inflation.  Because a savings account will always pay slightly less than the rate of inflation (yes, when you put your money in the bank, it is always slowly decaying away), the only options for a 401k account are stocks and bonds (and real estate if available as one of the options).  While substantial diversification is not desirable for our regular investment account if we want to beat the market, because we really aren’t able to pick stock in a 401k account–being limited normally to mutual funds–diversification is desirable so that we can at least get market returns.  While it is tempting to try to time the market, shifting from small to large stocks when we think large stocks will outperform small, or shifting out of stocks and into bonds when we feel that the market is near a peak, experience has shown that the rapid rises in stocks tend to occur over very short periods of time.  If we try to time the market and are wrong, we’ll end up doing far worse than the market.

The good news is that this makes 401k investing very simple, requiring very little time.  A good 401k plan will have a selection of funds that will include a money market, large growth stocks, small growth stocks, bonds, value stocks,  and international stocks.  Some funds may also include options such as emerging markets, REIT’s, commodities, junk bonds, and convertibles.  Here’s the strategy when you’re 10 years or more away from retirement:

1.    Invest equal amounts in the lowest cost funds in each of the main categories: large growth stocks, large value stocks, small growth stocks, small value stocks, and international stocks (20% in each).  If you don’t mind some volatility, you can also put a lessor percentage in the other, more risky funds (REIT, emerging markets, etc…), but these positions should be smaller, for example, 5% in each of these with 15% in the main categories).

2.  Each year (pick a date such as your birthday), rebalance the account so that the percentages are the same as you started with.  This will mean that if the value funds do better than the growth funds during the year, for example, you will be selling some of the value funds and buying some of the growth funds – selling high and buying low.   That’s it.

When you start to get within about 10 years of retirement, start shifting some of the funds over to bonds and income producing stocks, which are less volatile but also tend to produce lower returns, and then into cash (the money market)as you get very close to retirement for the funds that you will need within the next five years.  At retirement you will therefore have about 40% of the funds in bonds and income producing stocks, 5% in cash, and 55% in growth and value stocks.  As you get older you’ll continue to shift funds into cash as needed to cover five year’s worth of expenses and more funds into bonds and high yielding stocks since you can no longer stand the kind of market fluctuations that you could while you still had another source of income and didn’t need the funds right away.

Probably the most important thing to avoid is taking money out of your 401k account or borrowing from it before you are ready to retire.  401k accounts sometimes get bad names when compared to pensions, but the main reason is that people withdraw all of the money from their 401k account each time they change jobs or just to pay off bills.  This causes them to lose the effects of compounding over thirty or forty years – you’ll make most of your money in the last few years.  You’re not able to withdraw funds from a pension early, so even though pensions return maybe 5-6%, compared to 10-15% for a 401k invested in stocks, pensions end up looking like the better choice.  Avoid the temptation to take the money out (you’ll pay taxes of 35-50% anyway) and you’ll end up with a lot more at retirement than you would have if you had a standard pension plan.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Select Your First Stock or Invest with $2,000


Dear Smallivy,

Ask SmallIvy
Ask Small Ivy
In your 4th February 2013 you wrote:
“​If you are willing to learn to invest in individual stocks, $2000 is enough to buy shares in one company in the $10-$18 range.  Look for a stock that you think has good long-term prospects – one that you think will expand and grow for years to come – and expect to own it for a long time.

A final way you could invest $2000 is to buy shares in an Exchange Traded Fund (ETF) through a brokerage firm.  These are like mutual funds with super low costs that trade like stocks.

My question concerns stocks within $10-$18 range.  How do you find out stocks which has good long-term prospects – one that will likely expand and grow for years to come ?

Also, how many ETF shares do you buy with the US$2000 investment and what type of ETFs are the best?  There are different types of ETFs.  Do you buy one, two three or more ETF types with than investment amount of US $2,000?

Thank for your anticipated response.

Davidson

Davidson-

Thanks for the questions.  First on the question of finding a long-term growth stock, that is the subject of my next book, if I ever finish writing it.  In general you want to find a stock that has:

1.  A history of growing earnings in the 10-20% range (more is not sustainable).

2.  A lot of room to grow – they should have more markets to enter or they should be adding products.

3.  No dividend or a small dividend.  They should have plenty of places to put their earnings to grow the business, so they should not be returning money to shareholders just yet.  Also be wary of stock buybacks.

4.  A history of share price increases.  You want a company where you can almost lay a ruler over their share price for the last 5-10 years and see a steady climb.

Finding data is tricky, and finding a way to screen stocks is even harder.  I use a service called ValueLine Investment Survey, which is both online and in print, but it is pricey if you’re just getting started.  You used to be able to find copies in some libraries, which is a great way to go if you’re only going to be investing a few thousand dollars a year or so.  I’m not sure if this is still the case since today libraries are just where people go to watch you-tube videos.

Otherwise, just look around for companies that are relatively new and seem to have a good business, then check out their price charts and earnings on Yahoo or another online source.  I generally find restaurants and retail stores are great places to look since they can grow their businesses by just adding locations.  Be wary of stocks with a high PE ratio (greater than maybe 30) since these may be bubble stocks that will eventually come crashing back to earth.

The ETF question is much simpler.  With $2000, just buy one and buy all that you can with that $2,000.  Good choices to start are just simple, broad-based ETFs like those that track the S&P500 or the Dow Jones Industrial Average.  An ETF that tracks the small caps is also good.  Make sure the fees are low (less than 0.25% per year, maybe much lower).  People may think I get paid by Vanguard for endorsements (I don’t, except for the returns on their mutual funds and ETFs I receive in my own accounts), but Vanguard has a lot of great low-cost ETFs such as their S&P500 ETF and their Total Stock Market ETF.

In either case, you want to just make this your first step in investing.  Buy your first stock now, then save up and buy another, then a third and so on.  Build up positions in four or five stocks that are the best choices in four or five industries.  Start to diversify into ETFs or mutual funds when your portfolio starts to build beyond the point where you’re comfortable being concentrated.  (Also, you should be investing in mutual funds through your work 401k plan or a personal IRA as well since you can’t take the chances with your retirement savings that you can with your regular investing account.)

If you choose the ETF route, buy into your first ETF, then buy into a second then a third, getting positions in large caps, small caps, and International stocks, then add to those three ETFs regularly.  You could also buy into the Powershares High Quality Index (SPHQ), which is made up of solid stocks that won’t do as well in great markets but will not lose as much in bad markets.

Thanks for the question,

SI

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A New Theme for the Small Investor Blog


 

Ask SmallIvyWhen I started this blog about five years ago, my plan was to teach people how to invest and manage their cash flow to allow them to become financially independent.  This is the state where you are making enough money from your investments, and have paid enough of your loans off, to not need to work to sustain your lifestyle.  Since that time I have posted hundreds of articles and the blog has received hundreds of thousands of views.

Along the way, however, I realized that the scope of the blog needed to be expanded because the need was greater than the original focus.  Middle class Americans, along with those individuals in foreign countries that enjoy at least some economic freedom, have the ability to become financially independent if they make the right choices of how they handle their money.  And really, most people have the ability to enter the middle class in America if they make the right choices when they’re young, such as completing school, and getting to work when they are young adults.  This is because of financial freedom where you have the ability to make more by efficiently using your personal capabilities.

Things have been changing in America, however, where people have been giving away that ability in an effort for an easier life.  You see, freedom provides opportunity, but freedom also requires responsibility.  Being paid based on what you produce provides the opportunity to grow your income by working harder or gaining skills to allow you to be more efficient, but it also means that you need to put in the work to provide for yourself and your family.  Some individuals want to have a comfortable life but don’t want to put in the effort required under an economically free society.

Many people today are falling for the false notion that the government can magically provide for you without any effort on your part.  In actuality, you will always be the one doing the providing.  It is just a matter of whether you just produce and keep the goods for yourself, or you give the product of your work to the government and then have them give the portion that they choose back to you, minus the salaries of all of the people involved in distributing the goods.  When the government is collecting and distributing the money, you lose the ability to choose the less expensive option and invest the rest.  Also, if you make more the government just takes the excess, so you never have extra left over.  This is an impediment to becoming financially independent, which requires saving and investing, so an additional goal of the blog is to explain this false economics so that people can make better decisions in the policies they choose to support.

I’ll still be providing articles on how to invest and how to budget to have money left over to invest.  I’ll also discuss planning financially for retirement.  There will also be more articles on stock picking as I work on my second book that will be all about how to choose stocks that fit the serious investing model that I discuss in my first book.  I’ll just add articles on how to use this great thing we have called free enterprise to achieve the American dream of rising from poverty to wealth over a generation or two and discuss some of the forces trying to take away that dream from the next generation.

America has been a wonderful place because you don’t need to be born into a certain family or a certain caste to become wealthy.  You just need to learn skills, work hard, and manage your money effectively.  The goal of this blog is to preserve that ideal while sowing readers how to take full advantage.  I hope you’ll continue of the journey with me.

Got an investing question? Do you see something differently?  Have something to share with everyone?  Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.