Do I need a lot of money to start investing in stocks?
There’s a common belief that if you want to make money in the stock market, you’ve got to start with some pretty big bucks. This couldn’t be further from the truth and can be devastating to your retirement plan.
With the technological innovation made in the investing sector over the past few decades, investing has become accessible to every level of investor with every level of initial investment. Discount online brokers and trading platforms have gone to great lengths to make this possible.
Today, online brokers like SoFi Invest, Robinhood, and Webull have given up commissions on trades. Many online discount brokers even allow the purchase of fractional shares with a minimum investment of just $1, offering further access to large blue chip stocks with high costs per share regardless of the amount of money you have to invest.
Origins of This Myth
As is the case with most myths, the myth that you must have a huge account balance to make any money in the stock market is based somewhat in fact and somewhat in fiction.
The myth is based on two common beliefs about the ways in which the stock market is inaccessible to the everyday investor:
- Stocks Are Too Expensive to Buy With Little Money. Some argue that with Amazon.com trading at more than $3,000 per share, Alphabet trading at more than $2,800 per share, and Facebook trading at more than $350 per share, many of the big names are too expensive for the average investor to afford even a single share.
- Brokers Require High Minimum Deposits. Some believe that even if they had enough money to purchase stock in the big names, brokers wouldn’t let them unless they had large sums of it.
These beliefs sound true — and may have been in the past. But today’s world of investing is much more accessible to everyday investors with modest means. Still, these outdated ideas about the barriers to investing persist and are often passed down from one generation to the next, whether consciously or subconsciously.
Before the days of the online discount broker, access to the market was limited.
Before the 1970s, access to the stock market really was geared toward the affluent. During these times, the best way to access the market was through a full-service brokerage. Not only did these brokerages charge high commissions for each trade made, they charged a fee equal to a percentage of your portfolio dollars for their advice.
To add to the accessibility issues, these firms only wanted to work with people who had quite a bit of money in their bank accounts. These full-service brokerages would put high minimum deposits in place to weed out the investors that they couldn’t make as much money from.
The first discount brokers, Vanguard and Charles Schwab, didn’t come around until the 1970s and 1980s. When they did, they changed the game. With lower minimum portfolio balance requirements and reduced fees, these brokers started a trend of stock market access that would change the investing landscape for the better. Today, there are tons of commission-free brokers available.
How Believing This Myth Costs You
Some myths are fun twists on historical facts that don’t seem to have any consequences. This isn’t one of them. A widespread belief that you need a lot of money to make money in the stock market can be damaging to average investors in the long run.
Missing Out on Compound Returns
The beauty of investing is the incredible power of compound returns. Allowing a myth to delay your entrance into the stock market robs you of these compound returns, ultimately costing you thousands of dollars.
Compound returns is a term used to describe the act of reinvesting gains to expand earnings in the stock market. For example, if you were to invest $100 in the stock market today and earn the average historical rate of return, by the end of the first year of the investment, you would earn about $10 profit.
Simply earning $10 per year for 30 years would come to $300 in gains. But if you reinvest the gains each year and let compound work for three decades, by year 30 your total gains would come to $1,786.
That means that, in this example, compound gains on an investment of just $100 would add more than $1,400 to your overall gains throughout this period.
Imagine if you were to invest $100 per month over the course of 30 years. Your contributions during this period would total $36,000. However, thanks to the power of compound gains, your $36,000 would turn into about $218,498.
How Much Money Waiting to Invest Actually Costs You
Compound returns in the stock market are a real driver of wealth, but what happens when you wait to invest because you believe that you don’t have enough money to get started?
Using the example above, including a $100 initial investment and $100 monthly contributions, if you waited for just one extra year to get started and only had 29 years to invest, your ending balance would come to about $197,031 instead of $218,498. That’s a $21,467 loss as a result of delaying your initial investment by just one year.
If you were to delay your investment by five years, your total after 25 years would come in at about $129,396. That’s a loss of $89,102 that could have been realized over the course of those extra five years.
That’s the cost of believing this myth — $89,102 is a lot of money. It could mean the difference between a fully funded retirement account and having to scrape to make ends meet throughout retirement.
Having to Break Bad Habits
As a human being, you are a creature of habit. Once a habit is formed — whether good or bad — it’s extremely difficult to break. This basic human nature serves to exacerbate the dangers associated with the myth that you need to have a lot of money already in order to invest.
Under this belief, many people delay investing. Not only is this delay costly in terms of lost compound gains, it’s dangerous from a lifestyle standpoint. After all, when you delay investing, you’ll likely spend the money you might use to invest in other ways, creating unhealthy spending habits.
By the time you realize that you should start investing, you feel as though you don’t have any money in your budget for the process. At this point, before you have money to invest, you will need to break unhealthy spending habits to free money up, further extending your delayed market entrance and reducing your potential to earn through compound gains.
How to Free Up Funds for Investing
If your lifestyle won’t allow you to get started with investing because you don’t have any extra money in your budget, how do you free up money now to take advantage of compound gains? Get creative.
There are lots of ways to cut your monthly expenses. If you take advantage of just some of these savings opportunities, you could add hundreds of dollars to your budget for investing on a monthly basis.
If that doesn’t sound like much, remember that compound is on your side. If you started with an initial investment of $500 and contributed $500 per month to your investing portfolio, your portfolio value has the potential to grow to more than $1 million over the course of 30 years. So, making these small lifestyle changes and investing the resulting savings has the potential to turn you into a millionaire over time.
Imagine what you could do if you became even more creative about saving money for investing.
How to Start Investing
Now that you know how valuable it is to begin investing early and how to free up some funds, it’s time to start putting your money to work. What do you do if you don’t know how to choose individual stocks and are unsure of where to start? Here are a few types of investments to consider.
In an effort to get in on compound gains quickly, if you don’t know much about the market, start by putting money into a robo-advisor. Companies like Betterment, Acorns, and Stash offer full-service investment accounts that are simple to use. All you need to do is deposit funds and let the robo-advisor do the work of picking investments for you based on your financial goals.
Taking advantage of these types of services gives you the ability to start building returns immediately instead of waiting until you learn more about investing in general and building out your own portfolio.
Once you’ve started your account with a robo-advisor, it’s time to start researching investing and how it’s done. As you become more knowledgeable about the investing process, you can start investing your own funds in an attempt to outpace returns provided through your robo-advisor, or simply choose to stick with your current plan if it’s working out for you.
Investment-grade funds including exchange-traded funds (ETFs), index funds, and mutual funds collect investments from a large group of people, then invest the money they’ve collected according to the prospectus for their respective funds.
These investment vehicles are centered around diversification, offering protection by spreading figurative eggs across a wide range of baskets. So, if one stock, or group of stock falls, the remaining stocks in the fund’s portfolio help to limit losses or even maintain upward movement.
In fact, these funds are so effective that Warren Buffett once pointed to low-cost index funds as the best investments for most individual investors.
Consider Prebuilt Portfolios
Another option for new investors that doesn’t take much knowledge of the market but gives you the access you need is prebuilt portfolios. There are several portfolios out there that were developed by Wall Street experts, each following a specific investment strategy.
Some offer higher returns through aggressive investment tactics while others take the slow and steady approach in an effort to keep the overall investment safe from significant drawdowns. So, regardless of what your investment goals might be, there’s sure to be a prebuilt diversified portfolio that fits you well.
Setting up a portfolio like this is simple. You can find many popular prebuilt portfolios online, such as the Paul Merriman 4-Fund Portfolio, the Pinwheel Portfolio, and the Alexander Green Gone Fishin’ Portfolio.
You can also sign up for a brokerage account with M1 Finance and dive into the different portfolios, known as expert pies, it makes available. Once you find one that fits with your goals, simply load the expert pie to your portfolio and you’re all set!
No matter what you do, the important part is starting now. Don’t wait until tomorrow, next week, or next month. When you’re finished reading this article, your next move should be putting money in the market and taking advantage of the compound returns that your investments will create.
Many young people aren’t concerned about getting started in the world of investing. By the time they think of retirement, they’ve lost tens of thousands — or even hundreds of thousands — of dollars that compound gains from investing earlier would have generated for them.
Don’t be one of these people.
The fact is you don’t have to have a ton of money to start investing. Allowing this myth to delay your entrance in the market will cost you more money than you’ve ever imagined in the long run.
Many online brokers allow you to get started with $100 or less. Some let you start investing as long as you’ve got $1 to start with. So, don’t hesitate — give your retirement a fighting chance and start investing today.