Investment Guide for Beginner
Investing is the key to building wealth, and if you’re seeking to grow your $1,000 into something much bigger this year, you’re on the right track. However, the success of this depends on whether this $1,000 is your sole investment or if you’ll have more funds to invest in the future. Let’s consider a scenario where you only have $1,000 to invest and won’t be adding more. You can choose to invest this amount and let it grow over the next 10 years. Historically, returns have averaged around 50% per year. It’s important to note that these impressive returns were achieved with a very small initial investment.
Congratulations on saving up one thousand dollars! That’s a great achievement, and you’ve already done more than many people. However, I have some not-so-good news. If this one thousand dollars is all you plan to invest for a while, putting it in the stock market or riskier assets might not be the best idea.
Let’s imagine a situation where you invest your money and the stock market has a big increase, bringing a 25% return for the year. That’s 15% more than usual, and it’s something that would make professional investors very happy. However, if you only have one thousand dollars to invest, this would only give you a return of two hundred and fifty dollars, which isn’t enough to make a big difference in your life. Some people might think that putting their money in a savings account or a CD is a safer option because it guarantees returns. But, as of April 2024, the average return through a savings account is only 0.33%, which means your money would only grow to one thousand one hundred and six dollars over five years. While it’s safe, it won’t help you build wealth. CDs have a slightly better average return of 1.37% for a five-year term, but your one thousand dollars would only grow to one thousand sixty-eight dollars. That’s enough for some nice clothes, but it’s not going to make you wealthy. Even if you invest your money in the stock market and get an average return of seven percent over five years, you’d still only end up with fourteen hundred dollars. So, while investing in stocks might be the best option, it’s unlikely to change your life with such a small investment.
If you’re feeling worried right now, there’s actually something you can do to make more money and grow your wealth. Most people don’t realize their full potential, so investing in yourself is the best thing you can do. Follow your passion and learn new skills that can make you valuable to any company. Warren Buffett says educating yourself and investing in yourself is crucial. You can do this through books, webinars, seminars, or courses. Skills like marketing and coding are highly sought after and can make you indispensable to employers. Focus on acquiring skills that are in high demand but not commonly possessed.
A famous quote from Charlie Munger supports this idea: “Develop into a lifelong self-learner through voracious reading, cultivate curiosity, and strive to become a little wiser every day.” The more you learn, the more you grow, and the more your money and happiness will grow. Another thing you can do with one thousand dollars is to work on creating another income source. The great thing about this generation is that it’s extremely easy to make another source of income because of the internet. The hard part is doing the work and getting that business off the ground. However, if you invest in your knowledge, you can take action to create something with it. Then, you can use the money you make to either invest in your business to grow it more, or invest it in the stock market for steady income. Even if you have money coming in constantly, you always want to invest in your education and grow yourself, as it will never let you down. But the question is, what else can you do? What you’re looking for here is a source of passive income. This means placing your one thousand dollars and whatever amount you plan to add every month, and letting that money make money for you while you also work and make money for yourself. In fact, a powerful quote from Buffett confirms the importance of making your money work for you: “If you don’t find a way to make money while you sleep, you will work until you die.” And who wants to work their whole lives? Not many, I’m sure.
The most common way to earn passive income is through the stock market. But when I talk about the stock market, I’m not referring to it in the traditional sense. For most people, the stock market offers a way to invest in a wide variety of companies. For example, you can buy stock from companies like Tesla, IBM, or Google. When you own shares of these companies or any others, you own a small part of the company. If the company makes money, you make money. If they lose money, you lose it too. This can happen through changes in the price per share or through dividends. However, the recommended way to invest in the stock market is through index funds. As Warren Buffett said, “The best single thing you could have done… was just buy an index fund.”
Let’s use an example to illustrate further. Imagine you put all your funds into Tesla, but suddenly, all the latest models experience a battery malfunction, leaving thousands of people unable to drive their cars and causing potential accidents. With no clear fix except replacing the entire car, Tesla faces bankruptcy due to lawsuits and insurance claims. In this scenario, you lose everything you invested. However, the opposite can also happen. If Tesla innovates with a superior battery, doubling its sales and your investment, you can earn significant returns. Investing in individual companies can yield high rewards but carries high risks too. If you lack time to study companies, it’s best to avoid individual investing. Index funds, which are baskets of companies, offer a safer alternative, eliminating the need to pick individual winners.
Some examples include investing in the general market, a specific sector like tech, or companies that offer dividends. The best part is that these companies are easy to buy, just like stocks. However, it’s important to note that investing doesn’t guarantee profits, even with index funds. Always do your research and don’t blindly follow advice. General market funds, like VOO and SPY, are safe and reliable options for beginners. They provide exposure to the top 500 companies in the U.S., so if the economy rises, the fund rises too, and vice versa. If you’re interested in tech, you can consider VGT or QQQ, which include companies like Microsoft, AMD, or Google. Remember to research each fund to find what suits you best.
Lastly, if you’re interested in receiving dividend pay-outs, consider investing in VYM or SDY. These funds provide exposure to companies that pay dividends to their investors. When you’re ready to invest in these funds, a smart strategy is to allocate a portion of your pay check, typically around 10 to 15 percent, directly into your investment account. This ensures that you consistently save and invest without accidentally spending money earmarked for investing. As Buffett famously said, “Do not save what is left after spending, but spend what is left after saving.”
The second way you can use your one thousand dollars and additional money afterward is through real estate. Of course, one thousand dollars isn’t enough to buy a house to rent out, but there are other options available, thanks to the internet. For instance, you can use a crowd funding real estate platform, allowing you to invest small amounts with other investors to fund real estate projects. If the property makes money or its value goes up, you benefit too. These platforms primarily pay through passive income earned from rent. However, it’s essential to note that this money isn’t easily accessible since it’s tied up in physical real estate. Selling a home isn’t as straightforward as selling a stock. But if you’re comfortable with real estate investment, lack the capital to buy your own property, and aren’t concerned about limited access to your money, then this could be the right path for you.
Lastly, you can access indirect real estate through REITs, or real estate investment trusts. With REITs, you invest in a company that invests in real estate. You receive dividends from rent and other sales without being directly involved in physical properties. REITs typically pay higher dividends as companies are required to distribute 90% of profits to shareholders. Examples of REITs include VNQ and USRT. If you’re hesitant to invest or prefer not to, there’s another option: paying down your debt as soon as possible.
You can’t make financial progress if you’re constantly borrowing money at high-interest rates. Paying off debt early is like earning a return on investment. For instance, if you have a loan with a four percent interest rate, like a car loan or student loan, paying it off a year early effectively earns you a four percent return because it’s one less year of payments to the bank. Paying off debt quickly reduces interest payments, leaving more money in your pockets each month.