You don’t have much money? Invest anyway. Here is why
You would like to invest, but only have $50 per month to spare, and that’s not a lot. You think that to be an investor, you must have a lot more money and probably a degree in finance.
The truth is that you don’t have to.
You can invest small amounts of money and you don’t need a degree (I will return to that later). In theory you know that investing money is better than stuffing it under your mattress, or keeping it on a checking account (effective interest rates are 0.0%).
Example 1: In fact let’s take the US stock market. If you had invested money in 2013, you’d be rich now 🤑
On the other hand, if you had stashed 50 bucks under the mattress every month since 2013, you would have a grand total of $3,600. That’s as simple as 50*72.
And as simple calculations go, so does wishful thinking. Wishing I could resist that new Gucci handbag, staring at me from the shop window, or the specs-upgraded Mac, luring me with improved productivity. After all, it was uncomfortable to sleep on that wad of cash!
Investing in stocks
Let’s be honest, investing in US stocks would have been a better choice. Not only it would have kept my hands off that stash. But you would have made about $4,800, and that’s a 35% return on the stashed amount — (4800/3550–1)*100 — and no back pain either.
So why should you care?
Well, money buys you avocado 🥑 toasts. And we all know that’s all you want.
Also, you could have increased your savings over the last years, instead of de-facto losing money through inflation. In our example, inflation from 2013 until today amounted to a whopping 8.2% (see the inflation calculator).
Without loss of generality, this means that if you could afford 100 lunches in 2013, now you can only do 92 with the same money.
However, if you had invested in US stocks, today you would afford 127 of those lunches. So, choose some stock or an index like the S&P500 and start investing every month your 50 bucks.
Dollar-Cost Averaging
At which price you buy does not matter too much for this strategy. In fact, you spread your investment over several instalments and effectively end up paying an average price.
This strategy is called Dollar-Cost Averaging (DCA) and it guards you against very volatile markets as it avoids placing a single overpriced trade. You are less exposed to the “buying high and selling low” headache.
This strategy is actually very popular and it often comes attached to other financial products like the Individual Retirement Account (IRA) in the US 🇺🇸.
Other countries have that, too, for example in India the scheme is tied to your deposit (which yields more than 0%) and the product is popular under the name of Recurring Deposit (RD) 🇮🇳.
In the UK 🇬🇧, the practice is referred to as regular investing which is often paired to the Individual Savings Account (ISA).
Ok, but how do you effectively do DCA if the mattress is not an option? Should you go to the bank? Queue for half an hour, only to be told things you weren’t ready or wanted to listen to.
And to make things worse, now you have to read pages of conditions. Double sided and small print! Then comes the signing (you brought your ID, right?). And finally… “why am at the bank again? I just want to invest”.
To invest your money you don’t need to go to the bank! We’re in 2018 and you can use an app that links directly to your existing account. Check out Robinhood (US) or Freetrade (UK).
Not so fast
Logistics out of the way, now we are set to invest, right? You are probably thinking: “not so fast, what about that pesky 2007–2009 period?” Stocks didn’t do that well… what if we are approaching a slow market?
Example 2: Even during time of slow market growth, there was still growth.
Wow, that doesn’t look too great. Half of the time we are under the mattress (pun intended) and only in the end we recover in value.
Why bother when we just get the mattress amount at the end? No back pain! Remember? Ok, jokes aside, we can do better.
Invest in stocks only when there is a clear bullish trend — jargon for generally rising prices! The rest of the time, stash away and be ready to ride the bull when the time for stocks comes again.
The result is shown below (data and python code are available on colab 🤓).
Way better. We keep our money ready for the market rebounce, and end at $2,125 from a deposited amount of $1800 (50 * 36). That’s 18% on top of the mattress.
I’ve got your back
I know I promised “no finance degree needed” but how would you know when markets are going up or down?
You don’t. But what if you had an app that gave you the right info on the market and various stocks you might be interested in, updates on these stocks, and allowed you to switch from investing to stashing away or investing in a money market ETF (safer asset than stocks that guards against inflation), depending on the situation in the market and you were free to decide what to do? Sounds good?
Well, I am currently developing such an app. I will write another blog post over the next weeks, setting out the roadmap for 2019 and how you can be part of it. If you have any comments or questions, please comment below.
PS. Data and python code available on colab.
Let’s stay in touch
If you liked this post and would like to receive relevant updates or to stay in the know about future topics then let’s form a deeper connection!
Sign up to my newsletter. And don’t worry. I try to create quality and quality takes time (and I also hate spam).
