Small investments can lead to big returns with mutual funds or exchange-traded funds (ETFs). Beginning investors can leverage time, compounding interest, and the timeless investment strategies used by the pros to build wealth. To do this, you can get started investing with mutual funds or ETFs with as little as $100.
Small Investments Add Up
Albert Einstein purportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it. Compound interest is the most powerful force in the universe." That's a strong statement from someone whose scientific findings made the atomic bomb possible.
For long-term investors, the biggest impact on the growth of an investment portfolio is not just investment selection; it's time and compound interest. The more time you have, the more fuel you add to the impact of compounding interest. Think of the snowball effect. You begin with a small ball of snow and begin rolling it. As you roll the ball forward, it gets larger. And the bigger it gets, the more snow it accumulates.
Here are the points to remember on how small investments can build wealth:
- Get started early: Time is your best friend with investing. The more time you have to invest, the more time compound interest has to work for you. As the saying goes, the best time to get started investing is yesterday, the second-best time is today, and the worst time to get started investing is tomorrow.
- Invest aggressively: The more time you have to invest, the more market risk you can take. This means that longer time horizons allow for a greater allocation to stock mutual funds and ETFs and that short-term fluctuations in the market are of little or no concern. Together with time, higher average returns will help you to boost the growth of your investment portfolio.
- Invest regularly: This introduces another timeless investing strategy, dollar-cost averaging (DCA), which is the regular and consistent addition of money to your investment account. Many investors start what's called a systematic investment plan, which commonly establishes a monthly fixed investment amount. This way, you will consistently buy shares of your investment, no matter which direction (up or down) the market is going in the short term. When the market is up, you'll buy shares at higher prices and when the market is down, you'll buy shares at lower prices.
- Keep expenses low: Even if you pick the best funds and you invest regularly, high expenses will erode at your returns and make it much harder to build wealth over time. Only buy no-load mutual funds or ETFs and look for low expense ratios. Also, try your best to only invest in funds that charge no commissions or transaction fees.
The more money you have invested, the more money you accumulate. Therefore, the bottom line on accumulating wealth for beginners is to get started as soon as possible, choose investments that have historically produced returns higher than inflation, and continue adding to savings on a regular basis.
Start With Mutual Funds
Some of the large mutual fund companies, such as Vanguard, require investors to make a minimum initial investment of $1,000 or more to get started in an individual account. However, if you invest in a mutual fund through a 401(k) plan, there is no minimum initial purchase requirement.
If you want to get started investing in mutual funds for as little as $100, some mutual funds companies will waive the higher initial investment amount if you purchase your mutual fund in an individual retirement account (IRA).
Charles Schwab is an online discount broker that requires no fee or minimum to open an account and buy shares of their mutual funds. If you want to start your mutual portfolio with a low-cost, diversified stock fund, you may want to consider Schwab S&P 500 Index (SWPPX).
Invest in ETFs
Most fund companies and brokerage firms allow you to buy ETFs for as little as the price of one share. However, keep in mind that ETFs trade like stocks, which means that there is usually a small commission that investors pay whenever shares are purchased.
So, if you're investing $100 per month and there's a $7 commission owed for each purchase, that equates to a 7% expense, which is extremely high. You'd need a 7% return on your ETF just to break even. To reiterate a previous point, be sure to only invest in mutual funds and ETFs that charge no commissions or transaction fees.