Low-Cost Investment Ideas: Smart Ways to Grow Wealth
When it comes to growing your wealth, many believe investing requires a significant amount of capital and that it’ll be easier to save in the future (rather than today). However, we at The Prudent Speculator know that even modest sums can turn into meaningful returns over time. Indeed, it’s better to start investing today with a couple of dollars and let compounding and habit have their magic effects. Here’s a guide to some of the best low-cost investment ideas for individual investors, offering you the opportunity to start building wealth today by making consistent contributions and forming helpful money habits.
Micro-Investing: Invest Your Spare Change
We published a Special Report, To Retire a Millionaire Exercise Patience, in which we discuss the value of making frequent contributions over a long period of time. The chart below from the full report shows that modest contributions add up over time, meaning one doesn’t need to put away thousands of dollars per month to end up retiring with a million dollars or more. In fact, squirreling away $250 per month over 40 years is sufficient to accumulate $1 million, while $100 per month results in a final tally around $400,000. Put another way, recurring contributions of $100 per month for 40 years achieves roughly the same outcome as contributions of $250 for 30 years. In fact, 40 years of $100 contributions easily exceeds the final value of $500 per month saved for 20 years. It is those extra early years that allow the $100 to converge to similar ending values.
Don’t Delay: Invest Now & Invest Often!
Another key point from the Special Report, To Retire a Millionaire Exercise Patience, was that delaying investing–in any amount–can be costly. The figure below shows early contributions have a giant impact when it comes to easing pressure on annual savings needs. Excluding tailwinds like wage growth, a 25-year-old ‘only’ needs to contribute $3,467 per year to reach the $1 million mark by the time they are 65, whereas someone starting at 55 years old would have to put away nearly $68,000 per year. Investment returns account for a whopping $861,000 of $1,000,000 for a 25-year-old, compared with investment returns accounting for $323,000 for a 55 year-old saver.
ETFs Offer Affordable Diversification
While we have long argued that a broadly diversified portfolio of stocks is a secret to our survival of market ebbs and flows over the last 47 years and counting, it might not be possible to purchase 70 to 90 stocks in a portfolio. To work around that constraint, one option would be to buy fewer stocks. Empirically, one needs about 30 equal-weight positions to see useful benefits of diversification. A strategy might be to buy a single stock each month or slice of a stock (many custodians offer “stock slices“).
An alternative strategy would be to buy exchange-traded fund (ETF) shares and frequently add to that stake. While there’s nothing wrong with this strategy, we must caution that ETFs may be less diversified that it’d seem. For example, the S&P 500 Index ETF (SPY), which tracks the largest 500 stocks in the U.S. has nearly 40% of the fund allocated to just 10 names. It’s critical to review the underlying holdings to ensure what you think you’re buying is actually what’s in the fund.
Fractional Shares: Investing in Big Names on a Budget
Many custodians, including Schwab, offer the opportunity to buy individual stocks for less than $5. Of course, this won’t buy a whole share, but it does allow diversification in portfolios that have not yet had a chance to experience the miracle of compounding.
Schwab’s site offers the following suggestions on using Schwab Stock Slices:
Idea Generation: The Prudent Speculator
Perhaps funds don’t appeal for expense, quality or other reasons and you prefer to pick your own investments. The generally investable U.S. universe has more than 3,000 listed stocks, plus many more that trade in other venues, including internationally. The goal can be clear, but the opportunity set overwhelming. We suggest considering a newsletter like The Prudent Speculator, which distills the investment universe into an easier-to-manage bunch of stocks that are supported with Buy and Sell Alerts, stock-specific commentary and real-money investment.
One important note about The Prudent Speculator compared to some of the other newsletters out there is that TPS offers Sales Alerts, which let readers know when we’ve parted ways with a stock and includes commentary about our thinking. While we think you could build a diversified portfolio using only the newsletter, we understand that many of our subscribers have subscriptions to multiple sources concurrently.
Build Wealth Your Way
There are many ways to grow wealth with stocks. The common theme is that one must put cash to work and do so in a manner that’s consistent and thoughtful.
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With these low-cost investment ideas, you can start building your portfolio today. Ready to take control of your financial future? Subscribe to The Prudent Speculator for more expert insights.
