How To Invest Small Amounts of Money
Author’s Note: today’s topic was suggested by a reader, as was the topic two weeks ago, “Where Are All the Workers.” If you have an idea or suggestion for a topic you’d like me to write about, please reach out to me at bsprague1@gmail.com or ben.sprague@thefirst.com. Thank you to everyone who has been sharing the articles on social media or by forwarding the emails. It really helps to grow the community of Sunday Morning Post readers and I appreciate it. I am thankful for every one of my readers, but it is also fun and personally rewarding to see the audience grow.
How To Invest Small Amounts of Money
For the past few months I have been mostly writing about real estate and the economy, which is generally what I study and think about all day long as a V.P./Commercial Lender for Maine-based First National Bank here in Bangor, Maine. I have been in this job for a little over six years and I enjoy it very much. But prior to working for the bank, I spent six years doing investment management and retirement planning, first for Ameriprise Financial in Waltham, Massachusetts, and then for Means Wealth Management here in Bangor. I had my Series 6, 65, and 66 licenses and built a decent-sized portfolio of clients and assets under management before making a switch into banking.
My favorite thing about investment management was not stock picking or assembling a portfolio, though, it was the psychology of investing. Money is a loaded concept and the pursuit of it or the lack thereof makes people to do strange, surprising, and irrational things. And that is why people need investment advisors: to prevent them from doing dumb things.
In future weeks I plan to write more about the emotions of investing and how you almost have to force yourself to do the exact opposite of what might feel like the intuitive thing to do. There is an old investment axiom attributed to Warren Buffett that says, “Be fearful when others are greedy and be greedy when others are fearful,” or the slightly more morbidly impactful line from Baron Von Rothschild from the 18th century, “Buy when there is blood in the streets, even if it’s your own.”
I plan to write more about the emotions of money in the future. But today, however, I wanted to offer feedback and suggestions on this question: what is the best way to invest a small amount of money. It is a worthy question, particularly as the financial services industry much more commonly targets high-net worth investors. It is significantly more profitable for an investment company to manage a million dollar account than a $10,000 account let alone a $1,000 account (and, truth be told, I can say from my experience doing this work from 2009-2015 that there is very little correlation between the size of an account and the amount of time the advisor may need to put into it. I had million dollar accounts that required very little maintenance and people who were just getting started out who needed help and attention on what felt a weekly basis. It is unfortunately clear why firms focus on larger accounts; that is where the revenue is).
With the majority of the industry only targeting higher net worth people, however, it can perpetuate the growing gap between the have’s and have-not’s. It’s hard for people who are just getting started out or who don’t have as many resources to even know where to begin. That is just one reason I am eager to address the question of how to invest smaller amounts of money, which for the purpose of this discussion we will consider to be less than $10,000 (and really all the way down to people who are just getting started out with their first investment dollars). Certainly many if not most of the tips that follow are relevant for larger dollar amounts too.
*All usual disclaimers should apply here about how I am no longer a licensed investment professional and what follows is meant for educational purposes only. You should consult with a licensed advisor, CPA, attorney and/or others before making any investment decisions as each person’s circumstances are different.*
Investment Idea #1: Vanguard/VTI
When I was working as an advisor people would often ask me for my favorite investment tip. My answer was always a boring one: VTI, which is the ticker symbol for the Vanguard Total Stock Market Index Fund. This is a passive investment fund that simply owns shares of virtually every company that is traded on the New York Stock Exchange. When you own a share of VTI, you are actually owning little slivers of nearly 4,000 publicly traded companies. VTI is also weighted by company size, so companies like Apple, Google, and Microsoft make up larger percentages of the whole than smaller companies. Best of all, VTI has an expense ratio of just 0.03%, which is miniscule. Many mutual funds have expense ratios north of 1.00% and there is little evidence that greater expenses on an investment lead to greater rates of return.
For most investors especially those just getting started out, Vanguard is the way to go. You can set up an account online with Vanguard relatively easily with no annual fee if you sign up for e-delivery of statements. The minimum purchase amount for VTI is only equal to the amount necessary to buy one share, which at the time of this writing is about $225.
If I were to go back to being an investment advisor, I would be tempted to just put all of my clients’ accounts into VTI (depending on the client's risk tolerance) and let it ride because the average annual rate of return for VTI even as a passive investment is likely greater than the average investor’s typical rate of return due to all manner of reasons including the emotions of investing that I discussed above. That would not necessarily be a viable business strategy as clients expect more complex portfolios than simply buying a passive investment, but the truth of the matter is that VTI has probably outperformed most retail investors’ portfolios over time. The average annual rate of return for VTI since its inception in 2004 is 8.69%. Over the last ten years, it has been a whopping 16.60%. But no one would hire an advisor who just puts their investments into VTI because that is too simple.
Investment Idea #2: Betterment
Betterment is an online advisory company that can tailor a portfolio of low-cost investments for you based on a series of questions you answer about goals, objectives, risk tolerance, and time horizon. There is one transparent annual fee equal to 0.25% of the account balance, which, like Vanguard, is much lower than some of the higher priced options out there. There are also Betterment plans that cost more if you want to be able to speak to an advisor through Betterment regularly, but for most people who are just getting started out, a “set it and forget it” strategy is generally okay if you are investing for the long-term. For those truly just beginning, the minimum deposit amount is just $10. Betterment also boasts of having socially responsible investment options for those who are interested.
Investment Idea #3: Fractional Shares through Robinhood
Robinhood is an app that lets users buy and sell stocks in real time. The company got caught up in a bit of controversy earlier this year by halting trading on several so-called “meme stocks” like GameStop and AMC during periods of extreme volume and volatility, which is worth bearing in mind because Robinhood is still a relatively new company and this landscape is still a bit uncertain. But one interesting thing they do offer is the ability to buy fractional shares in a company. If you want to buy Amazon stock, for example, one share is currently trading for over $3,000/share. That price alone may be more than a new investor is willing or able to take on. Fractional shares, however, allow the investor to purchase less than one full share, which gives the investor exposure to a company without being compelled to allocate more of their portfolio than they want to single shares of a company.
Tip #4: Real Estate….Funds
A lot of people getting started out are eager to invest in real estate. Rental properties, brick and mortar commercial properties, raw land: I see it all every single day as a commercial lender especially with interest rates being so low and borrowing capacity being so high. But if you don’t have a down payment for a real estate purchase, which can typically be 20% of the purchase price or more, or if you don’t want the risks and hassle that come with actually owning real estate and managing tenants, there are other options out there even if you do want to invest in real estate.
Sticking with Vanguard is a good option for the majority of people in my opinion. My favorite real estate fund through Vanguard has a ticker symbol of VNQ. Vanguard describes the fund as, “Invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property. Offers high potential for investment income and some growth; share value rises and falls more sharply than that of funds holding bonds. Appropriate for helping diversify the risks of stocks and bonds in a portfolio.”
VNQ is a great way to get exposure to the real estate market without having to handle specific properties or investments. The minimum purchase amount, as with other Vanguard funds, is equal to the price of one share, which at of the time of this writing for VNQ is just over $100, and the fund boasts a low expense ratio of 0.13%. The average annual rate of return on VNQ since its inception in 2004 is a healthy 9.05%, which is all the more impressive considering this period of time includes a significant drop in the real estate market during the Great Recession. Fair warning, this investment is not necessarily for the faint of heart as it did drop nearly 20% in 2007 and then nearly 40% in 2008 before rebounding over the next few years.
To wrap up here, I want to reiterate that each person’s investment situation is different and these tips should be taken as topics for your consideration and not ironclad advice. It is important for people to get some investments started to the extent possible, however. Albert Einstein once described “compounding interest” as the strongest force in the universe. Einstein is sometimes attributed with calling it the 8th wonder of the world. Investors need to get the boat in the water to start taking advantage of the compounding impact from the passage of time even if they are doing it with a small amount of money at the beginning.
It can feel overwhelming to start investing with such low dollar amounts and, to be sure, to grow a million dollar portfolio you’ll have to not just get small investments going but continue to contribute to the portfolio steadily as resources allow. But there is an old Chinese saying along the lines of, “When is the best time to plant a tree? Answer: 50 years ago. When is the second best time? Today.” The same is true of investing.
Lastly, I have two other brief suggestions for those trying to improve their finances and maximize their opportunities for growth. First, pay off high interest debt. There can sometimes be a tension between investing or paying off debt, which may be worthy of its own article topic at some point in the future. Paying off any debt at interest rates of greater than 7-10% or more should be an immediate priority for people. Lower interest debt like a home mortgage is less of a priority to pay off as long-term fixed rate mortgages are very attractive right now with interest rates being as low as they are.
Second, if you work for an employer that matches retirement plan contributions, make sure you’re doing that. If your employer matches 50% of your contribution up to 6% of your salary, for example, try to do whatever you can to contribute 6%. The 3% of your salary that your employer chips in through this match is virtually free money, plus you get tax breaks for saving into your retirement plan, which makes the contribution even more valuable. But just based on the match alone, it’s almost like getting a 50% immediate rate of return on your investment. That is hard to beat.
And finally, not every return on investment is easily quantifiable. I’ll share a piece of advice I got once when I was just getting started out in my career: sometimes the best investment you can make it not in any sort of stock, investment fund, savings account, or even paying down debt. Sometimes the best investment you can make is something like a new suit or a piece of exercise equipment or even a good mattress. You just have to make sure the suit gets worn, the exercise equipment doesn’t become a coat rack, and the mattress is the right fit and firmness. I can’t remember who said it and I am sorry for the lack of attribution, but I heard a person say once they always made sure to pay enough for a high quality bed and mattress so that no matter how bad their day was they knew they were going to come home and at least have a good bed to sleep on. I think that is a pretty good attitude and perspective, especially as people are going to generally perform at a higher level during the day if they have had a good night’s sleep.
So, remember, investments come in all types and styles. In 2012, I cashed out part of my 401(k), which no financial advisor would ever recommend doing, in order to buy an engagement ring for my now wife. THAT proved to be the best investment possible, on which I continue to achieve an excellent rate of return.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram and subscribe to this weekly newsletter by clicking below.