How to Get into Investing with $3,000


Ask SmallIvy

Unless you own a business, the most likely way that you will become a multimillionaire in your lifetime is to invest a portion of your income into the stock market.  In fact, people who buy $5,000 used cars every five years and invest the money they would have been spending for car payments with new cars in stocks will gain more than a million dollars over their lifetime just from that decision.  Investing allows you to multiply the money you earn, which makes it a lot easier to gain enough money to become financially independent than it would be to simply earn the money through work and save it.  Paying cash and not paying interest for the things you buy also helps because it lets you keep more of the money you make.

To get started in investing, about $3,000 is a reasonable sum.  The easiest way to invest is to put your money into mutual funds.  These invest in a large number of different stocks, can be purchased by setting up an account online and then using a few clicks of a mouse, and have a performance that bests many professional investors.   $3,000 would allow you to buy into several high-quality, low-fee index mutual funds.  Once you take the initial position, you can send in smaller amounts to buy more shares of the fund.  You can even set up auto-draft to send the money from your bank account to the fund automatically each time a paycheck is deposited.

As an example of mutual fund strategies you could use, let’s look at one of the best families of funds, Vanguard .  For $3,000, you can get into the following funds:

Vanguard S&P500 Fund

Vanguard Explorer Fund

Vanguard Mid-Cap Index

Morgan Growth Fund

Vanguard Small-Cap Index

Windsor II Fund

The first fund invests in the stocks contained in the S&P500 Index, which is a group of large, well-known companies.  The second fund invests in small US stocks and generally makes risky, potentially high profit investments.  The third fund, the Mid-Cap Index, buys medium-sized companies contained in an index of medium companies – some of which will be tomorrow’s leaders.  The Morgan Growth Fund is a managed fund that tries to invest in companies the managers believe will grow earnings more rapidly than the average stock.  The Small-Cap Index buys stocks in an index of small companies; a very volatile group but one that has the largest potential for growth.  The last fund, the Windsor II Fund, invests in stocks the managers feel are good bargains relative to expected earnings and other factors.

There are two different types of funds on this list – managed funds and index funds.  The managed funds will have larger fees than the index funds, averaging about 0.40% of assets (or $4 for every $1,000 invested) versus about 0.20% of assets (or $2 for every $1,000 invested) per year for the index funds.  Note that this is low for managed funds, where many funds charge 1% or more, but still costs more than unmanaged index funds because you need to pay a group of managers to select stocks, where an index fund just buys whatever is prescribed by the index it is tracking.

If you decided to go the managed route, you might select the Morgan Growth Fund to start, then save up another $3,000 and buy into the Windsor II Fund.  In doing this, you would be using the two main stock picking strategies – momentum and value.  Momentum investors buy companies that are doing well and going up in price with the expectation that they will continue to do well.  Value investors find companies that have been beaten down and therefore are good bargains compared to that for which other companies are selling.  Over long periods of time in the past, value investing has done better than momentum investing, mainly because less is lost during market downturns, but both strategies have been in the lead during different periods of time.  By buying into both funds, you’ll cover both bases and make sure a portion of your portfolio is getting the best returns possible at any given time.

If you decided to go the index route, you might first invest $3,000 in the Small-Cap Index Fund, then save up another $3,000 and buy into the S&P500 Index Fund.  In this case you’re buying both momentum and value stocks in each fund.  You’re also buying equal positions in large and small companies.  Overlong periods of time, the Small-Cap index will do better than the large stocks because the companies have more room to grow, but it will be a bumpier ride.  Because the large companies have dividends and multiple product lines in multiple countries, they will be hurt less during market downturns.  Over periods of a few years, there will be times when large stocks will do better, and others where small companies will do better.  Once again, if you buy into both you’ll ensure yourself of having money in the best performing sector at any given time.

Once you have made your initial purchases, the two most important things to do are to 1) leave the money alone and never try to trade to beat the market  and 2) be constantly investing more, buying whichever fund you have less of at the time you’re ready to invest. 

You must accept that you will never be able to guess where the markets will go next because all available information is already priced into the price of the stocks.  Most of the big gains made in the markets that result in the high returns compared to bank accounts are made during a period of a few days or weeks that occur randomly over a period of many years.  If you pull your money out thinking that you’ll miss a downturn and then jump back in, you might miss out on a big rally and only make 5% for the year when the mutual fund you were investing in makes 40%.  You’ll also be paying taxes on any gains if you are investing your money outside of a tax-advantaged account such as an IRA.  Not only will you be paying money in taxes, but you’ll miss out on the compounding that the money you pay in taxes would have generated.

You must constantly be buying more because you need to build up a large position to really make the life-changing gains that investing can provide.  Buying in periodically also allows you to get a better price on the funds you buy because you’ll be buying more shares when prices are low than when they are high.  This means that during periods where the fund price remains essentially unchanged you’ll still make money because you’ll have bought shares on dips in price and lowered the average price you paid for the shares.  If you had dropped all of your money into the market right before the 1929 market crash, it would have taken about 15 years for you to get back to even.  If you had investing right along, putting money into the market every few months, you would have made a ton of money during those 15 years despite the crash.

To learn more about investing and how to manage the money you earn to become financially independent, check out the SmallIvy Guide to Investing, Book 1: Investing to Grow Wealthy.  In there I go through a lifelong strategy of money management, plus give all sorts of information on different investment options and the risks involved.  It also explains how individual stock investing can be used as a way to possibly outperform the market averages for those who want to use individual stock investing to add to their mutual fund investments.

Got and investing question? Please send it to 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.

Mutual Fund Investing to Get Market Returns

blackberriesMost people do not get market returns when investing in mutual funds, even though they own so many different stocks through those funds that they should be nearly matching the market.  This means that while the stock market may return 10-15% over long periods of time, your returns may be only 5%. Instead of doubling every five to seven years, your portfolio value will double every twelve years.  As a result of lower returns, you will have hundreds of thousands of dollars less by the time you reach retirement.

There are two things that cause your portfolio to lag the market.  One of them is purely due to your behavior.  The second may very well be within your control.  These things are 1) trying to time the market or pick the hot funds and 2) fees and taxes on investments.

Buy in and stay in.

The biggest reason people lag the markets is because they sell stocks and miss out on a big rally, then buy stocks after they have had a big run-up, just before they fall back. This is caused by the way people select mutual funds.  They look at returns over the last year or the last five years and buy the ones that have had the best return.  Alternatively, they use a rating system like Morningstar or a list of the “best funds,” both of which designations usually mean that the fund has done well over the last several years.  People also tend to sell their funds and switch into the funds that have outperformed theirs.

When a fund has done well, it means that the stocks it holds have increased in price, meaning that a lot of them are high relative to their normal valuations.  Likewise, a fund that has not done well likely has a lot of stocks that are bargains compared to their fair market value.  This means that people are selling stocks when they are cheap and buying them when they are expensive.  Do this year after year and you’ll see your portfolio returns lag the market returns.

Instead, you should be buying funds strictly based on allocation of your money to different sectors of the markets.  This is based mainly on your age or, more accurately, how long it will be before you will need to start using some of the money in your portfolio.  Since most people are investing for their retirement, they need to look at how long they have before retirement and use that as a guide to allocation of their money.  Someone investing for college or some other event should allocate based on time until that event.  A good allocation for someone saving for retirement with 30 years to go would be:

30% in a small cap fund

30% in a large growth stock fund

15% in an international stock fund

15% in a value stock fund

10% in an REIT fund

Someone who was five years from retirement might allocate as follows:

5% bank CDs

40 % in a bond fund

10% in an REIT fund

10% in an international stock fund

30% in a large cap stock fund

5% in a small cap growth fund

These allocations are made only based on investment time frame – how long you have to invest – and on the amount of risk the investor can withstand, given life circumstances.  Once invested, you don’t shift to one sector of the market or another because it does well.  In fact, you adjust the amount you have in each sector to maintain your allocations.  This means that if small growth stocks do well one year, you would sell some portion of that fund and direct your investments into the other funds that didn’t do as well.  If you are investing in a taxable account, such that sales of winners would generate capital gains taxes, you could also just shift your future allocations in the funds that are under-represented in your portfolio instead of selling and moving money from fund to fund.

Minimize fees and expenses.

The other reason people lag the market is due to fees and expenses.  If you have the choice between two different funds that invest in the same portion of the markets, realize that because the funds are buying so many different assets that their returns before fees and expenses will basically just match the returns of the markets.  This means that a fund that charges a fee of 1.5% a year will have a return that is 1% less than one that charges 0.5% per year.  While this may not seem like a lot, realize that every dollar you pay in fees when you’re in your 20’s will result in about $120 less in your portfolio when you retire.

The first way to minimize fees is to choose passive funds over actively managed funds.  The active funds have a team of managers who spend their days choosing stocks or bonds, travelling to meet with corporate boards, and sitting in large conference rooms, swilling lattes that you are probably paying for as an investor.  Instead, choose a passive fund like an index fund or an ETF that uses a pre-defined strategy for choosing stocks.  For example, an index fund would just buy whatever is in the index it is designed to track.  Because there are less decisions to make,  and because you don’t have a manager there constantly selling and buying securities in an effort to try to beat the markets, these funds can have really low fees.  In fact, recent competition in some of the building block funds like S&P500 funds have resulted in the cost for these funds dropping to a few dollars per $10,000 invested per year.

The seconds way to reduce fees and expenses is to be very passive in the way you handle your portfolio.  While it makes sense to rebalance your portfolio about once a year to shift money from sectors of the markets that have done well into those that have not done as well, too much churning drives up the costs for the funds you invest in, which in turn increases your fees.  If you are investing in a brokerage account and buying ETFs, you’ll pay a commission on each transaction.  In addition, you may generate capital gains taxes if you’re in a taxable account.  All of these things pull money out of your portfolio, reducing the amount of money you have available to compound and grow.

Got and investing question? Please send it to 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 Start Investing in Stocks with $10,000


There are really two different ways to invest in stocks, also known as equities:  1) invest via mutual funds (or ETFs), and 2) invest in individual stocks directly.  There are plenty of financial advisers who will tell you that investing through mutual funds is the only way to go, and given the way that a lot of people invest in individual stocks, they are right.  Because many people go in and out of stocks, churning their account, creating a lot of taxes and fees, and often missing out on a lot of big moves because they sell a stock too early, most people would be better off investing only through mutual funds.

Still, if done right, individual stock investing can make sense and be very profitable, especially for money that you have to invest after putting away money in your 401k and kids college plans that is invested primarily or entirely in mutual funds.  People can (and do) beat the market averages by investing in individual stocks over long periods of time.  This isn’t done by timing the market or jumping from stock to stock in an effort to be in the next hot stock at just the right time.  It is done by investing in a very uncommon way that actually takes far less time and effort than the market speculating most people do.  Here’s how to start investing in individual stocks with $10,000:

Find businesses, not stocks.  The first thing to do is to get the mindset of a business investor, not a stock trader.  A stock trader is concerned about the movements  in the price of individual stocks and tries to time purchases to make profits.  People who say things like “buy low and sell high” are stock traders.  Instead, make investments in businesses that you think will do well over the next several years.  Think the same way you would if a friend presented you with the opportunity to invest in his business.  You would check things out from the standpoint of being locked into the investment for the next several years, knowing that it would be difficult to sell.  Once you invested, you would also see the money as “gone” unless the business succeeds and does well.  You wouldn’t expect to see any of your money back if the business failed.  If the business did succeed, you would expect to receive profits from the business for many years rather than selling your stake to someone else immediately.  You want to find businesses that will grow and become more profitable over the next ten or twenty years, eventually paying out a share of the profits to you each year in the form of dividends.

Things to look for when choosing a stock are the earnings growth rate (something in the teens is good), a history of steady increases in share price, a good management team who has shown that they know how to manage the business well, a high return on equity figure (at least 10%), little or no debt, and the ability to continue to grow the business.  Earnings growth is what causes the share price to increase over long periods of time and is what eventually leads to dividends and then dividend growth.

Concentrate your investments enough, but not too much.  If you are going to buy 50 or 100 shares of twenty different companies, you might as well just put your money into a mutual fund.  The advantage individual stock investors have over the pros is that they can concentrate their money so that when the stock does well they’ll make huge, life-changing profits.  Hold 100 shares of a company at $20 and its stock price goes to $80 and you’ll make $8000.  This is nice, but not life changing.  Hold 1000 shares and you’ll make $80,000 – enough to maybe pay off your home or put a child through a couple of years of college.

Still, you don’t want to have so much of your money in a single stock that it would be financially devastating should you be wrong.  Individual companies do go bankrupt, and when they do, even though the company may emerge out of bankruptcy a few months later, the stock investors are usually wiped out.  Don’t put more into a single investment than you can stand to lose, and cut back on positions that get too large and start to dominate your portfolio.    You can (and should) eventually start to put some of your profits into mutual funds to gain diversification and preserve the gains you have made.  If you do well, the dollar amount you have invested in individual stocks will remain about the same but it will become a smaller and smaller portion of your portfolio as you shift money into mutual funds.

Gather a watch list.  You’ll want to find 3-5 stocks that will become your watch list.  These are the stocks that will become your initial holdings and will be your only holdings until your portfolio has grow substantially.  When you have money to invest, you’ll buy whichever of these stocks is at the best price at the time and which best balances your portfolio based on the amounts you hold of each stock.

These should be stocks that you expect to do well over the next several years and your watch list will change little from year-to-year.  This is why it doesn’t take a lot of time to invest once you have developed your watch list.  You only move companies from the watch list if the business fundamentally changes and you only add companies to the list once your portfolio has grow to the point that you need additional diversification.  Having a small number of companies allows you to get to know the businesses very well.

Wade in slowly.  You’ll want to buy in stages, rather than investing all at once.  Don’t expect to buy at the bottom.  Sometimes you’ll buy in, only to see the stock decline in value.  Don’t despair – that just means that you’ll be able to buy more shares at a bargain price.  Remember that it is the business you’re buying, not the stock, so share price movements shouldn’t matter much to you for a while.

With $10,000, I would take $6,000 and invest about $2,000 each in three of the companies on my watch list.  I would then wait a couple of weeks to a month and hope that one or more of them would decrease in price.  As they did, I would take the $4,000 remaining and buy more shares until I was fully invested.

Keep adding to your positions.  From that point, I would keep saving up money from my salary and investing whenever I had $2,000-$3,000 to invest, buying whatever was the best bargain from the companies on my watch list or adding to smaller positions to keep things in balance.  I would wait until I had a reasonable amount to invest to avoid paying too high a percentage in brokerage fees.

It is regular investing that helps you succeed.  By buying over a long period of time, you get a better price for the stock since you’ll be buying more on dips.  This also helps psychologically since you’ll see decreases in share price as buying opportunities rather than losses on your portfolio.  I’ve had stocks that were paper losses in my portfolio for a year or more who later turned around and become some of my biggest successes.  Remember that you are buying the business, not the stock.  Share price won’t matter for many years down the road.

Monitor the company, not the stock price.  Of course you’ll glance at your brokerage statement from time-to-time and see which positions have grown and which have fallen, but that shouldn’t be your primary focus.  In fact, if you wanted to just ignore the share price most of the time, that would be just fine.  When the stock drops in price, there is nothing you can do – the damage has already been done.  When it shoots up,  watching the price closely may allow you to convince yourself to do something foolish like selling out and wait for a decline to buy back in, perhaps only to see the stock continue to climb.

Instead, you should focus on the fundamentals.  Read through the annual report when it comes out and get an idea of how the company is doing and what their plans for growth and expansion are.  If they see earnings decrease, see if there is something systemic or just a result of market forces beyond their control.  It is only if something has fundamentally changed in their business or their opportunities that you would sell out of a company.

You should also monitor for things like decreases in earning growth rate, changes in return on equity, and taking on a lot of debt.  Changes wouldn’t necessarily result in your selling, but they may point to fundamental changes in the business or market that would mean it was time to sell.  Sometimes you’ll also just choose a company that just doesn’t work out, and by monitoring fundamentals you’ll decide that you made a mistake.  Sometimes the share price will have already fallen, other times it will not.

Trim back if a position does too well.  You certainly want to leave your holdings with room to grow.  You don’t want to sell out each time that a stock goes up a little or you’ll end up with a lot of losing positions and miss out on a lot of growth.  Companies that do well tend to keep doing well since it normally means that management has hit upon a good business strategy and you have effective managers and employees working for you.  Sometimes you’ll also get a Microsoft or a Home Depot that will make you a millionaire if you bought in early and held your stake.

Still, you don’t want a position to become so large that it will become financially devastating for you should something happen, because it can.  You should always ask yourself if you could withstand the loss of the entire position.  If the answer is no, sell some shares and invest the proceeds elsewhere, holding some of the profits back to pay for taxes on the gain.  Also, if you’ll be needing the money for something in the next few years and you have a stock that has done really well, it is generally a good idea to cash out and put the money in bank CDs or elsewhere so that it will be there ready when you need it regardless of what happens to the stock.

Got and investing question? Please send it to 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.