[JonJon]

Hey Guys,

I'm a long-time lurker, first-time poster. Recently I read Booshala's topic on side hustles. It was eye-opening and inspiring. So much so that I was motivated to pose a question on investing.

So here's the situation. You have 500 dollars. Knowing what you know now, how would you go about investing it so that it would yield some significant returns over time?

In other words, to all you seasoned investors with some bit on knowledge, how would you advise a person completely ignorant of the stock market to invest their first 500 dollars.

Thanks for any input you might have.

[RawGod]

I'd get another $5000 the same way I got the first $500.

[iknowexactly]

It's so little that your return would be very small and not really worth the work.

As raw god says, save up more and buy something safe like JNJ

[JonJon]

@RawGod

I wasn't able to put your comment into context until I read the next comment.

@Iknowexactly

So you 2nd the notion of $500 being too little. Ok fair enough. Though I'm not exactly sure what "JNJ"s are.

Currently I'm reading a very basic guide to investing called The Motley Fool's Investment Guide. I'll add more to the discussion as I learn.

I'm still curious though to see what other forum members think.

[DrugAdvisor]

Don't learn trading with such a small capital.

In fact, don't learn to trade at all.

Not until you have built up a substantial portfolio of SPY or the likes.

[PhDre]

Your capital is too small for investing as the other posters have said.

Let's say that after working your day job, sleeping, eating, working out and social contacts, you have 10 hours of spare time left per week. You want to use that time to improve your financial position. What are you going to do: work on a second job/side hustle or learn investing? Make no mistake, learning to invest takes a lot of time and research.

I will use myself as an example. I earn roughly 30k a year after taxes and I spend 20, so I save 10k a year. My capital is 50k. In my eyes, you are a really good investor if you manage 5% annual interest in the current economic climate (I am not an investor myself, correct me if I'm wrong). If I spend my 10 hours a week on becoming that really good investor and on managing my portfolio, I will thus make 2.5k a year (5% of 50k).

However, I am an engineer. If I start my own consulting business and I manage to find customers, I can easily bill them 75 dollars per hour. At 10 hours of work per week, that is a gross income of 750 dollars per week. At 40 weeks of work per year, my side gig will make me 30k per year. After costs and taxes, I will probably take 20k home - 8 times as much as I would have made by investing my capital.

My example is very rough and contains a lot of assumptions, but I think it gets my opinion on the subject across. There is a big chance that you can make more money by working on a second job than by investing your capital. I think you should only switch to investing when you can make more money that way than by working. This will depend on multiple factors:
- your capital
- interest rates and economic growth
- your professional skills and the amount of money you can charge for them

As I said, I am not a seasoned investor. I started working only two years ago and I never got a financial education. If I make flaws in my reasoning, please point them out and offer your opinion.

[void]

I calculated that you would need 0,5-1% capital gain each day, for several years to get rich with that small investment capital. If you have 100k in the bank and you gain 5%+/year, its another thing.
The only sure way would be, writing a program that earns 0,5-1% capital gain each day after taxes and trading costs. If you can automate such a program, you could probably try to get more money for your cash machine from somewhere else.
Big % is in options and futures, but this is quite real gambling.

[JonJon]

The general consensus is that 500 is not enough capital to start. Ok.

I'll keep reading and learning and immersing myself in the particulars as I continue to build my capital.

Thanks for the input guys.

[Brodiaga]

Invest in an index tracking ETF, such as this Vanguard ETF which tracks S&P 500

https://personal.vanguard.com/us/funds/s...=INT#tab=0

Don't try to outsmart or time the market unless you already have a substantial amount of money and want to gamble with around 5% of it or less.

[lavidaloca]

When I make share purchases I always buy atleast $2000 of it to ensure my fees are less than 0.5%. A $500 investment would seemingly have a 2% fee (assuming $9.99 trading) that is pretty significant in itself.

Vanguard is great. I have about 30,000 in an S&P 500 ETF from Vanguard and another 30,000 in a Russell 2000 ETF from Vanguard but with that said it also depends what you are trying to do. In Canada we have extremely favourable taxation of dividends from Canadian public companies making dividend stocks perfect for someone who wants to live off of passive dividend income.

Try to buy businesses you understand. Less than 5% of my portfolio is in businesses I don't understand. (Bio and tech stocks).

Either way $500 is a pretty small amount to start with. If you are paid biweekly try to save a certain amount and then buy more shares every couple months.

I am far from what I'd consider a seasoned trader though. That is just my take on things.

[Chapped3rdEye]

(03-03-2015 08:34 PM)lavidaloca Wrote:  

Try to buy businesses you understand. Less than 5% of my portfolio is in businesses I don't understand. (Bio and tech stocks).

I agree with this. What I've done in the past is to pick a company that I like as a consumer, vet them a little (P/E ratio, debt, current CEO, etc), and then get 100 shares. 100 shares enables you to write an option on the stock, which means you can make some money even if the share price doesn't rise.

[monster]

No one mentioned above but the reason why 500 is so small is that commissions will eat every trade you want to do. The house will always win. I don't think you could really do any trading with less than 5k, just buy and hold.

[polymath]

I'm a trader at an investment bank.

I would put the $500 into a bank account and focus instead on how to minimize everyday costs. It's much easier to save $5,000 in a year than to turn a 1,000% return on $500.

Half of making money is refusing to spend it unnecessarily.

[JonJon]

@polymath

I second that notion. I'm currently employing a strategy of being frugal to ultimately eliminate debt and boost my savings.

[JDizzle]

FYI Robin Hood (an app only available for iPhone atm) has zero commision

[lowside]

(03-03-2015 08:06 PM)Brodiaga Wrote:  

Invest in an index tracking ETF, such as this Vanguard ETF which tracks S&P 500

https://personal.vanguard.com/us/funds/s...=INT#tab=0

Don't try to outsmart or time the market unless you already have a substantial amount of money and want to gamble with around 5% of it or less.

Textbook answer right here. If you're not going to daytrade, this is how you should invest.

[Yeti]

The thing about investing is that at first, the amount that you have to invest is much more important than the rate of return.

$500 is not much to work with. You can just invest it in a Vanguard index fund and spend the interim growing your stash and learning how to invest.

Check this out:

Applying compound interest: Lessons learned from the magic penny
http://radicalpersonalfinance.com/156-ap...ing-penny/

It's a great explication of how compound interest plays out.

The most important rule about compound interest is that you need a big pot of cash for compound interest to really start making you wealthy.

In other words, don't worry too much for now about how to invest your $500. What's more important is adding to your investment capital. For now, the best way for most people in your situation to do that is through income, that is, by working and saving.

When you have saved about $150,000 or more, then you start getting to the point where your accumulated capital can start to pay your expenses, if you live modestly. ($150,000 x 7% return = about $10,000 the first year in passive, no work income if you invest in an index fund in an average-to-below average year of stock market return - the amount will increase every year if you don't spend it.)

[lavidaloca]

In fairness, a 7% withdrawl rate is on the high side for someone who isn't actually retirement age. I'd be personally comfortable with up to 5%. The difference in each % though can be substantial once you begin to withdraw as opposed to reinvest.

Take a look at it this way. Assume you take out 7% a year and get 10% a year returns. Your spread is 3%. The rule of 72 suggests it will take 24 years to double your money. Short term this may not seem like a huge deal but for someone who leaves regular work at 40 the ending difference in net worth would be alarming.

Now someone who withdraws 5% and gets a 10% a year return. Your spread is 5%. The rule of 72 suggests it will take 14 years to double your money.

A 10% return is probably a bit optimistic. When I do my calculations I always assume an 8% average return as I feel the probably of my return being equal to or greater than that is much higher at that rate. You also have to factor in some level of inflation. I factor in 2-3% and that is where taking out say 7% a year can run into problems. Your money may very well decline in value long run.

The one situation where a 7% withdrawl could make some sense is if you are able to factor in a presumed inheritance at some point in the near future that will knock you back down to more reasonable withdrawl rate. That is the problem with the typical 4% rule (a common financial concept that suggests that you would never run out of money in a 30 year retirement at any past period if you only take out 4% a year) is that it doesn't factor in realistic outcomes...i.e. many people at some point will inherit money and may work again for a period of time allowing capital to build.

[Easy_C]

Well said.

Here's why you don't invest $500.

For you to get any significant returns on investment(along with higher risk) you need a margin account. The catch is that the minimum deposited allowed by FINRA for margin accounts is $2000