We all have to start somewhere. If I recall correctly (it was years ago), the first 1K I actually “invested” was in a stock mutual fund. After which I began sending in $100 a month whenever possible. It was nothing exotic. No gold, no commodities, no emerging markets. Just a good old fashioned US stock fund. Why? Because over longer periods of time, stocks have been shown to provide a return superior to all other investments. In my case, it was a highly rated growth fund with an excellent long-term track record, low fees and experienced managers with long tenure. Over the years, my mutual fund investments have paid off nicely.
I’m getting ahead of myself though. I began my adventure into the stock market only AFTER I had my financial house in proper order (as pretty much every financial advisor recommends).
Prior to seeking out investment ideas, consider first your debt situation and your ability to handle a financial crisis. If you have installment/credit card (non-mortgage) debt… forget about investing for now and pay off the debt. Your investments are very unlikely to return more than the interest you are paying on these debts.
Second, establish an emergency fund with enough funds to cover 3-6 months of living expenses. A household with multiple wage earners can probably get away with a 3 month fund. With only a single source of income…. I’d shoot for 6 months. The money should be placed into a liquid (easy access), low risk account. Avoid passbook savings accounts at your local bank. The interest rate they pay is typically pathetic. Look for money market funds, certificates of deposit (check into “cd laddering”) or online savings banks which typically pay a MUCH higher interest rate. For example, as I write this article, my local bank pays .50% interest on regular savings. That’s right… one half of one percent. My online bank pays a little over 5% (ten times higher interest) and is still FDIC insured and basically risk free. Want to guess where my emergency fund is parked?
There….. now that you have a more comfy financial cushion you can think about where to put the first $1,000 for “real investing”.
If you listen to all the pundits you will go insane trying to figure out who to believe. Buy gold, sell gold, buy lots of stocks, sell all your stocks, buy bonds, get out of bonds…. blah, blah….blah.
Frankly…. with only $1000 to invest, you are wasting your time (and money) to even think about buying individual stocks (see “UNLESS” below). Why? One of the “biggies” when it comes to investing is diversification, aka… don’t put all your eggs in one basket. You can’t diversify with $1000, I don’t care who you are… UNLESS you buy tiny amounts (less than $1,000) of stock in several companies.
If you try to buy tiny amounts of stock through regular channels (with a broker), the percentage of each transaction that is lost to broker commissions will eat you alive. There are a couple tiny share channels available to you though. You can look at services like “ShareBuilder” (find them online at sharebuilder.com) or in some cases you can buy stock directly from the company through their Dividend Reinvestment Plan (DRIP). Both allow you to buy small amounts at a time at a cost which is much lower than a typical broker. Research these items further before you jump in so that you know exactly what to expect, etc.
On the other hand….. with a small amount of money for investing, you may be much better off just buying into a mutual fund that invests in whatever you want to invest in. Obviously, you have research a little to find the best one for you, but in the case of stock funds you will usually get the diversification you need because the fund owns many different stocks. Additionally, you leave the stock picking to the fund manager(s). Over time you can make periodic contributions to your fund(s) and as the years progress, you can enjoy the magic of compounded wealth.
Enjoy your entry into the investing world and remember this….. If you don’t understand exactly how it makes money for you….. don’t invest in it.