Invest Small Amounts Of Money: How To Make Money Investing With Little Risk

June 16th, 2009

When we consider the concept of “making money”, most of us see the standard path, which is go to work to earn an income, and try and increase that income over our lifetimes. That means that our view of making money is one that consistently puts us at the service of our money. History has proved time and time again, though, that people who get ahead financially are those who do the exact opposite: they make their money work for them.

Making your money work for you means that you have to get into the world of investing. When you don’t invest, the partnership between you and money is a one-way thing: you work hard to get it, but you fail to put it to work hard to get you even more. The worst part of it is that your money is a much more efficient worker than you could ever be. When you put your money to work for you, it does so 24/7, 365 days a week. So you’d better get to it!

The main reason why most people don’t invest is that they sincerely believe that they need to have a lot of money at their disposal to begin investing. Nothing could be further from the truth: it’s entirely possible to invest small amounts of money at a time, lowering your risk, and still make very good money. Similarly, people think that they have to start investing in those fancy financial instruments with complicated names and concepts (like buying stocks on margin or commodities exchange traded funds) in order to make money. Once again, it doesn’t have to be this way! All you have to do is choose an investment vehicle with a decent risk/reward profile and invest in it consistently.

When you invest (even if it’s $50 a month), once you start getting returns on that money, your investment will pretty much start taking a life of its own, thanks to the compounding effect. The power of compounding will cause your small, consistent investments to become a small fortune a lot sooner than you think. All you need to do to make money investing, and achieve true and sustainable wealth, is to commit yourself to setting aside a little amount of money to invest on a regular basis, and then give your investment time to grow.

Another benefit of investing in small amounts is that you avoid the stress associated with getting into the market right before it dips. Although we do know that over time, your portfolio will grow, no one likes to see their portfolio dwindle before their own eyes. So investing a little at a time allows you to sort of ease yourself into the market, without having to plop down your nest egg and worry about it being literally on the line. Actually, while it might sound counter-intuitive, recessions offer plenty of money making opportunities, but this is beyond the scope of this post.

To invest in small amounts, you don’t need a full-service broker, and that’s another tremendous advantage. You can go for a web-based discount broker, like ShareBuilder, E-Trade, or Zecco, to pay a low fixed price per trade and bring your transaction costs to a minimum. Their fees are much lower than those of full-service brokers and their services are easy to use, so it’s really a no-brainer.

What you need to do to be successful at investing in small amounts is to keep it simple. You can use the investing technique of dollar cost averaging (popularized by the Louie The Loser advertising campaign) to choose an index fund to invest in on a monthly, quarterly, or yearly basis (it’s recommended to invest monthly, it’s easier to budget and keeps you focused). Index funds are recommended because they have low expenses, provide instant diversification, and are very simple to manage (as maintenance-free as it gets). Check index funds ratings and past performances to choose the one that will suit you best. You can also use the same approach to zero in on a specific company or sector to invest in; just keep in mind that you’re sacrificing diversification in exchange for potentially higher profits.

The amount of money they invest is what separates investing winners from losers. The losers will go for the homerun, betting the whole house in order to make a killing. What happens 99 times out of 100 is that they lose everything and are never seen again. The smart investors, who turn out to be the winners, are content with singles, walks, and bunts. They will go for a double, triple, or even a homerun, but they don’t base their entire investing strategy on it. They invest a certain amount here, a certain amount there, testing the waters but never investing more than they can afford losing. They invest small, learn the ropes of the market, lose some, win some more, and keep building their knowledge and experience level. Eventually, they have what it takes to make serious money on a regular basis, even though that doesn’t mean they stop losing. They just win more than they lose.

The world of investing can be a tricky and risky one. Yet there’s no denying that it also offers the opportunity to make large amounts of money. If you can keep a level head on your shoulders, you can certainly do very well for yourself. Even as a stock market beginner, you can be very successful.